JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Mikhail Ganelin +7 (495) 983 18 00 (ext. 54583)
[email protected]
Russian Infrastructure
Yakov Yakovlev +7 (495) 988 24 92 (ext. 22492)
[email protected]
To build or not to build — that is the question
Matvey Tayts +7 (495) 980 43 89 (ext. 54389)
[email protected]
Source: Federal Special-Purpose Program, Gazprombank estimates
Infrastructure investment breakdown 3% 2%
8%
28% 9%
12%
24%
14% REGIONAL ROADS GENERATION GRIDS AIRPORTS
FEDERAL ROADS RAILWAY INFRASTRUCTURE МЕТРО PORTS
Source: Finance Ministry, CBR, Gazprombank estimates
Pension savings dynamic, RUB bln 5,000
10%
2017E
2016E
2014
2015E
2013
2012
2011
2010
2009
0% 2008
0
NON-STATE PENSION FUNDS PRIVATE AM VEB % OF GDP Source: Finance Ministry, CBR, Gazprombank estimates
Top 15 country-recipients of Chinese direct investment 61
ARGENTINA
ALGERIA
IRAN
PERU
VENEZUELA
SAUDI ARABIA
NIGERIA
RUSSIA
24 24 21 21 20 18 17 17 15 15
KAZAKHSTAN
31 31
UK
39
BRAZIL
72
INDONESIA
80 70 60 50 40 30 20 10 0
CANADA
Cooperation between Russia and China in the development of infrastructure is strengthening. Over the past 10 years, the volume of Chinese investment in foreign assets rose from $19 bln to $150 bln per year. In 2014, direct Chinese investment in Russia doubled according to CBR estimates to $1.3 bln, with a goal of increasing this figure to $20 bln. This is being facilitated by the project envisioned by China entitled the Silk Road Economic Belt, which proposes active cooperation in growth and integration between neighboring countries, including through Chinese financial resources under the auspices of the Asian Infrastructure Investment Bank (AIIB), in which Russia is participating as a founding member.
0 500 1,000 1,500 2,000 2,500 3,000 3,500 2016-2020 2011-2015
2007
…while the proportion of off-budget investments will be on the rise. Pension savings will become a large source of financing for infrastructure projects. This is the main internal source of long money, i.e. over RUB 300 bln per year amid restricted access to external markets. An additional source will be NWF (up to RUB 1.7 trln on infrastructure), which will help to complete on schedule a number of projects in progress. Amendments that have been passed concerning laws on the securities market, on joint stock companies and on concessions aim to expand the ability to draw investments into infrastructure and lower risks for investors, who maintain a keen interest in high-yield projects, especially road concessions and airports. The scope of infrastructure bonds is set to increase dramatically, perhaps exceeding RUB 1.5 trln by 2020.
REGIONAL ROADS FEDERAL ROADS GENERATION RAILWAYS GRIDS METRO AIRPORTS PORTS
US
Reduction of infrastructure investment... In 2015, investments will be cut by 10-15% of the scheduled volume due to a decrease in budget spending, while about RUB 11 trln will be spent on transport and energy infrastructure (RUB 2.2 trln or $40 bln on average) until 2020, in line with investments made over the past five years. However, investments will contract in real terms depending on the inflation rate and their proportion in GDP will decrease from 3.5% to 2.5%. The energy sector will see the steepest decline (-37%), followed by airport and port infrastructure (12% and 45%, respectively). Road development will account for half of investments, but their growth will not exceed the inflation rate. The priority will be on projects associated with the World Football Championship in 2018, the Moscow-St. Petersburg Highway, and the Central Ring Road. Investments in railway infrastructure are stagnating and the greatest growth in investments will go toward expansion of the subway system.
Investment in infrastructure, RUB bln
AUSTRALIA
Low oil prices and a fall in budget revenues have forced the government to reduce spending on infrastructure, though this is partially compensated by recovery of the accumulated pension system and money from the National Wealth Fund. Meanwhile, changes to laws on concessions and the securities market heighten the attractiveness of the sector for private investors. In this report, we analyze how the volume and structure of investment in infrastructure will change by 2020. We focus in particular on China’s policy relating to investment in assets of foreign countries, including Russia.
Source: Heritage Foundation
Research Department
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Copyright © 2003-2015. Gazprombank (Joint Stock Company)
JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
CONTENTS Investment in infrastructure ............................................................................................................................ 3 Investment in Russian infrastructure ................................................................................................................................................................... 4 Railroad infrastructure................................................................................................................................................................................................ 7 Core investment projects ........................................................................................................................................................................................... 8 Highways ......................................................................................................................................................................................................................... 11 Russia’s seaports .......................................................................................................................................................................................................... 17 Airports ............................................................................................................................................................................................................................ 23
Sources of financing .......................................................................................................................................... 29 State budget .................................................................................................................................................................................................................... 29 NWF.................................................................................................................................................................................................................................... 31 Pension savings ............................................................................................................................................................................................................. 31 Bank loans ....................................................................................................................................................................................................................... 34
Legislative amendments ................................................................................................................................. 35 Chinese investment in foreign assets ......................................................................................................... 37 China’s investment in Russia .................................................................................................................................................................................. 40
New “Silk Road” .................................................................................................................................................. 42 Appendix 1: Russian-chinese joint projects ............................................................................................. 46 Appendix 2: List of infrastructure bonds .................................................................................................. 48 Appendix 3: Russia’s largest public infrastructure companies ......................................................... 50
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JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
INVESTMENT IN INFRASTRUCTURE: BEST TO HEIGHTEN EFFICIENCY DURING A CRISIS It is well-known fact that an increase in government spending to develop infrastructure is a good instrument with which to fight recession, as it facilitates a multiplication effect within the economy. Companies from various sectors become involved in construction, which leads to the creation of new jobs, while growth in employment helps support consumption. However, in Russia’s current economic conditions, the multiplication effect from such investment will be minimal, as the country continues to enjoy a low level of unemployment (5.8%), while the cost of capital is high. This means that there are no resources for new jobs, and companies will use a significant part of their income to service current debt rather than make new investments. On the other hand, given the current economic downturn, a decision to reduce public investment would exert further pressure on the economy and thus may be unacceptable.
An increase in government spending on development of infrastructure is a good instrument with which to fight recession, as it facilitates a multiplication effect within the economy. However, in current economic conditions, the multiplication effect from such investment will be minimal.
Consequently, we believe that the best solution is to maintain public investment on a level seen over the several past years until interest rates decline to a comfortable level and the economy resumes growth. However, during the current period of high interest rates and marginal private activity, the government should focus on expansion of funding mechanisms for infrastructure projects and improvement of legislation, including for the purpose of reducing risks for investors. As soon as robust economic growth resumes, these factors will drive an inflow of private investment. We note that such solutions aimed at supporting investment in infrastructure projects that are under government consideration generally coincide with our views.
During the current period of high interest rates and marginal private activity, the government should focus on expansion of funding mechanisms for infrastructure projects and improvement of legislation, including for the purpose of reducing risks for investors.
Need to support investment at a high level amid a shortage of funds is forcing the government to seek effective solutions more quickly Over the past year, the Russian government has made a range of important decisions that significantly improve the attractiveness of investing in domestic infrastructure.
The government decided to preserve the cumulative part of pensions, which will become the most important source of funding for infrastructure projects.
A range of substantial amendments that heighten the potential to attract investment in infrastructure projects and reduce risks for investors have been introduced into laws on the securities market, joint-stock companies and concessions.
The government is working on a mechanism for collecting tolls from heavy trucks for access to federal highways. which will supply budgets with additional funds that can be used for road construction projects.
The quality of presentations on large infrastructure projects implemented by such corporations as Avtodor is improving noticeably. This helps to attract many participants to the relevant tenders (3-4 large consortiums) while increasing the competitiveness and efficiency of investments.
The government also continues to reorganize the country’s airports. Moscow’s largest airports have been merged into holdings, the controlling stakes in which will be owned by private investors. Regional airports have been transferred to the ownership of local authorities, which should organize the privatization process and attract private investors for further development of these airports.
Russia has intensified talks with China regarding joint development of transportation corridors. The construction of a high-speed mainline from Moscow to Kazan is consistent with China’s large-scale project dubbed the “Silk Road Economic Belt”.
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JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Investment in Russian infrastructure projects stagnating, not declining, but their share in GDP is decreasing As in our previous infrastructure overview report entitled A Big Ship Sails Far (published in 2014), we based our research on updated and revised programs as well as documents aimed at stimulating investment in Russian infrastructure projects.
Federal Budget Spending for 2015-17;
Federal Target Program: Development of the Transport System of Russia until 2020, updated in April and June 2015;
Transport Strategy until 2030;
Federal Law on Concession Agreements on Securities Market;
Investment programs of Russian Railways, Avtodor, airport operators, and large stevedoring and electricity companies;
Throughout 2016–20 a total of RUB 11 trln will be invested in transport and energy infrastructure (RUB 2.2 per annum on average. or $40 bln), comparable to overall investments made for the previous five years. Zero growth will reduce the share of investment in GDP from 3.5% to 2.5%.
Throughout 2016-20, a total of RUB 11 trln will be invested in transport and energy infrastructure (RUB 2.2 per annum on average, or $40 bln), comparable to overall investments made over the past five years. Zero growth will lead to a decline in the share of investment in GDP from 3.5% to 2.5%. Utilities will face a major decline in investment (-37%), while the figure for airport and seaport infrastructure will grow by 12% and 45%, respectively. Road development will account for almost half of all investment. The top-priority projects include those that need to be completed before the 2018 World Football Championship: the Moscow–St. Petersburg highway and the Central Ring Road (TsKAD). Investment in railroad infrastructure, which accounts for 12% of all investment, is stagnating as well. Essentially, extension of the BAM and Trans-Siberian Railway remain the only large-scale projects in the near term. Should construction of the Moscow–Kazan HSR commence (our estimates do not yet incorporate this project), infrastructure will see another spike of investment totaling RUB 1 trln. Transport infrastructure spending to rise in nominal terms but decline in real terms We estimate that RUB 9 trln (around RUB 1.8 trln per annum, $32 bln) should be invested directly in transport infrastructure (roads, railroads, airport and seaport construction, reconstruction and extension) within the next five years (2016-20), equal to around 2.0% of GDP vs. 2.3% over the past five years. Compared with our analysis from last year, the nominal figure will remain nearly flat but in real terms will be lower given the higher level of inflation. Our analysis reveals that transport infrastructure spending in 2015-16 will be cut by around 10-15% of the initially planned volume, although the figure will not be lower than the 2013-14 nominal spending of around RUB 1.6 trln. A cut in federal budget expenditures will be offset by higher financing from the NWF and the pension savings system. Thus, although the financing issue is challenging, it is far from critical. Not feasible to cut financing of many projects Moreover, we believe it is impossible to cut the financing of many infrastructure projects. Many projects, including the Moscow — St. Petersburg HSR and Moscow Metro, are under currently construction, and reduced funding will merely complicate the situation. Moreover, Russia is committed to providing high-quality infrastructure for the 2018 World Football Championship (e.g. the TsKAD) and thus there is no leeway to slash investment. Another example is the surprising boost in passenger traffic on domestic flights, among other reasons caused by ruble devaluation and the growing popularity of domestic travel. Thus, reducing investment in airport modernization also seems risky (thus the extension of Sheremetyevo airport is underway, while construction of a new airport in Rostov-on-Don has begun). Lastly, ruble devaluation has triggered an increase of raw material exports, which has created a need for more intensive investment to expand seaport export capacities.
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It is impossible to cut the financing of many infrastructure projects.
JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
As for weaknesses, we note the challenging situation in regional roads funding. Many regions are in much poorer financial condition than the federal center. The total budget of regional road funds will decrease by 12% to RUB 713 bln in 2015, according to Federal Treasury estimates. However, we expect actual spending to be even lower, i.e. about RUB 540 bln (-23% YoY). Overview of investment in infrastructure, RUB bln 2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
20112015
20162020
Federal roads
349
442
505
527
505
500
567
528
537
610
2,329
2,743
Regional roads
425
646
731
709
545
586
616
642
672
710
3,056
3,226
Railroad infrastructure
234
288
275
222
266
196
264
280
273
342
1,284
1,355
Metro
50
96
100
144
178
171
176
181
181
181
569
891
Airports
31
41
64
79
85
76
76
65
60
61
301
337
Seaports
18
26
43
38
71
79
69
57
46
36
196
286
1,108
1,540
1,717
1,718
1,651
1,608
1,768
1,752
1,769
1,941
7,735
8,838
21.4%
39.0%
11.5%
0.1%
-3.9%
-2.6%
10.0%
-0.9%
0.9%
9.7%
2.0%
2.5%
2.6%
2.4%
2.2%
2.0%
2.0%
1.9%
1.8%
1.8%
2.3%
1.9%
Generation
603
523
637
546
392
367
333
330
309
306
2,701
1,646
Grids
355
329
325
284
177
174
179
213
216
216
1,470
998
Total electric utilities
958
851
962
830
569
541
512
543
525
522
4,170
2,644
CAGR
5%
-11%
13%
-14%
-31%
-5%
-5%
6%
-3%
-1%
% of GDP
1.7%
1.4%
1.5%
1.2%
0.8%
0.7%
0.6%
0.6%
0.5%
0.5%
Total infrastructure investment
2,066
2,391
2,679
2,548
2,220
2,149
2,280
2,295
2,294
2,463
11,905
11,482
13.5%
15.7%
12.0%
-4.9%
-12.9%
-3.2%
6.1%
0.7%
-0.1%
7.4%
3.7%
3.8%
4.0%
3.6%
3.0%
2.6%
2.6%
2.5%
2.3%
2.3%
3.5%
2.5%
Total transport infrastructure CAGR % of GDP UTILITIES
CAGR % of GDP
Source: Gazprombank estimates
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JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Investment in infrastructure, RUB bln 3,000
4.5% 4.0%
2,500
3.5%
2,000
3.0% 2.5%
1,500
2.0%
1,000
1.5% 1.0%
500
0.5%
0
0.0% 2011
2012
2013
2014
FEDERAL ROADS METRO GENERATION
2015
2016
2017
2018
REGIONAL ROADS AIRPORTS GRIDS
2019
2020
RAILWAY INFRASTRUCTURE PORTS % OF GDP Source: Gazprombank estimates
Investment in infrastructure, 2011-2015 vs. 2016–20, RUB bln
Breakdown of investment in infrastructure, 2016–20, RUB bln 8%
REGIONAL ROADS
3% 2% 28%
FEDERAL ROADS
9%
GENERATION RAILWAYS 12%
GRIDS METRO AIRPORTS
24%
14%
PORTS
0
1,000
2016-2020
2,000
3,000
4,000
2011-2015
Source: Federal Target Program. Gazprombank estimates
REGIONAL ROADS
FEDERAL ROADS
GENERATION
RAILWAY INFRASTRUCTURE
GRIDS
МЕТРО
AIRPORTS
PORTS Source: Federal Target Program. Gazprombank estimates
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JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Railroad infrastructure: Eastern Polygon is the only major project slated for implementation. Will there be an HSR? The volume of investment in the railroad sector under the Federal Special-Purpose Program entitled “Development of the Transport System of Russia” will amount to RUB 2.1 trln ($38 bln at a RUB/USD rate of 55) in 2016-20. This is 46% more than was spent over the previous five years (2011-15), although at the projected annual average inflation rate of 7-8% in real terms investment could remain virtually unchanged. According to our estimates, about 60% of all spending under the program — RUB 1.3 trln or RUB 260 bln ($5 bln) per year — is expected to be earmarked directly for the expansion of railroad infrastructure. The rest will go toward purchasing locomotives, railroad cars, R&D and social projects not directly related to infrastructure. Over the next few years, the largest projects in the sector will be as follows: construction of the Eastern Polygon (expansion of BAM and the Trans-Siberian Mainline), expansion of approaches to Russia’s northern and southern ports, and construction of the Northern Latitudinal Railway — the Salekhard–Nadym railway spur and a bridge across the Ob River. A new project in the program calls for construction of the 748 km Prokhorovka-Bataysk railway line, which should bypass Ukraine. So far, this project is not included in Russian Railways’ investment program and it can be implemented only with support from the federal budget. Furthermore, a project to build the Moscow-Kazan High-Speed Railway (HSR) has still not been included in a special-purpose investment project or in Russian Railways’ investment program, although the design stage has already kicked off. Elegest – Kyzyl – Kuragino – state-private partnership in railroads Construction will soon commence of the 410 km Elegest – Kyzyl – Kuragino railroad, which will connect coal deposits in the Republic of Tuva with Krasnoyarsk region and Russia’s main railroad lines. Road building is part of a large-scale vertically integrated project that includes development of the large Elegest coal field, construction of a mining and processing plant, a railroad to deliver coal, and a coal terminal in the Far East at Vanino port. The key aspect of the project is that it is being implemented with funds from a private investor – Tuva Energy Industrial Corporation (TEPK). A total of RUB 133 bln will be directly invested to build the railroad, while RUB 86.9 bln will be contributed from the National Wealth Fund. Following the completion of construction, its throughput capacity will allow to transport around 15 mln tonnes of coal per year. A memorandum of intention to build the railroad was signed with the Chinese contractor China Civil Enginееring Construction Corporation (ССЕСС). The project has great potential for further expansion – the railroad may be extended to West Mongolia and further to China, which will give Russia a new transportation corridor for trade with Asian countries.
7
At the projected annual average inflation rate of 7-8% in real terms, investment in railroads could remain virtually unchanged.
Over the next few years, the largest projects in the sector will be as follows: expansion of BAM and the Trans-Siberian Mainline, expansion of approaches to Russia’s northern and southern ports, and construction of the Northern Latitudinal Railway – the Salekhard-Nadym railway spur and a bridge across the Ob River.
JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Largest railway infrastructure projects INVESTMENTS IN 2011-15, RUB BLN
INVESTMENTS IN 2016-20, RUB BLN
EXPECTED TIMELINE FOR COMPLETION OF CONSTRUCTION
145.0
415.0
2014-18
Construction of the Prokhorovka–Bataisk railway (bypassing Ukraine)
0.0
479.8
2017-20
Expansion of railway approaches to seaports of Russia’s North Basin (Baltic)
74.4
43.0
2010-18
Expansion of railway approaches to southern seaports
6.5
30.9
2010-20
Expansion of the Tobolsk–Surgut railway (transportation of petrochemical feedstock)
38.3
14.4
2017
PROJECT Expansion of Trans-Siberian Railway and Baikal-Amur Mainline (BAM)
Construction of the Salekhard–Nadym railway (for gas production in Yamal)
0.0
84.7
2017-2018
Construction of a railway bridge across the Ob River near the city of Salekhard
2.0
67.1
2015-19
Moscow-Kazan High-Speed Rail Project
0.0
1,068.0
2016-18
Source: Federal Target Program “Development of Transport System of Russia”, Gazprombank estimates
Core investment projects LIMITING ELEMENTS
2012
2015–2020
Sections
2012
2015–2020
Stations
2012
2015–2020
Electricity supply, electrification and dispatching control
EXIT TO PORTS OF MURMANSK AND ARKHANGELSK
DEVELOPMENT OF PASSENGER SERVICE BETWEEN MOSCOW AND ST. PETERSBURG
Murmansk ENSURING GAS PRODUCTION ON YAMAL
Saint Petersburg Konosha
CARGO BYPASS OF MOSCOW HUB
Vorkuta
EXPANSION OF TRANSSIBERIAN RAILWAY AND BAIKAL-AMUR MAINLINE
Yaroslavl
Moscow
APPROACH TO FAR EAST PORTS
Noyabrsk Perm Rostov-on-Don Novorossiysk Tuapse
Saratov
Ufa
SHIPMENT OF FEEDSTOCK FOR PETROCHEMICALS INDUSTRY
Yekaterinburg Tobolsk
Samara Volgograd
Sochi
Kazan
Surgut
Chelyabinsk Omsk
PASSAGES TO SOUTHERN PORTS
Vanino
Lena Novosibirsk
Achinsk
Novokuznetsk EXPANSION OF RAILROAD CARRYING CAPACITY FROM URAL TO CENTRAL REGION
Komsomolsk-on-Amur
Tynda
Barnaul
Taishet Irkutsk
Khabarovsk Severobaikalsk Chita
Ussuriysk EXPANSION OF EXPORTS TO CHINA
Vladivostok
RECONSTRUCTION OF BOTTLENECKS ALONG TRANSSIBERIAN RAILWAY AND ENSURING COAL SHIPMENT FROM KUZBASS
Source: Expert magazine, citing data provided by the Institute of Economy and Transport Development
Expansion of BAM and Trans-Siberian Mainline (Eastern Polygon): construction is underway Among the projects approved for the next three years, the bulk of investments will go toward one — expansion of the Baikal-Amur Mainline (BAM) and the Trans-Siberian Mainline (the Eastern Polygon) at a total cost of RUB 560 bln. Sources of financing will be as follows: the federal budget (RUB 110 bln), the National Wealth Fund (RUB 150 bln), VEB and state banks (which buy infrastructure railway bonds), as well as the operating cash flow of the railroad monopoly itself (around RUB 300 bln). (We provided details on this project in our report of last year).
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Among the projects approved for the next three years, the bulk of investments will go toward one – expansion of the Baikal-Amur Mainline (BAM) and the Trans-Siberian Mainline.
JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Planned investment in railway infrastructure projects, RUB bln 400 350 300
4
250 22
200
125
125
125
342
150
288
100
234
198
275
273
125
200 141
50
139
155
2017E
2018E
56
0 2010
2011
2012
2013
2014
2015E
INCL. TRANS-SIBERIAN AND BAIKAL-AMUR RAILWAYS EXPANSION
2016E
2019E
2020E
INVESTMENTS INTO RAILWAY INFRASTRUCTURE
Source: Federal Target Program “Development of Transport System of Russia”, Gazprombank estimates
Sources of financing for Russian Railways capex, RUB bln 600 480
500 395
400
389 250
317 300 200
467
234
217 216
72
98
98
120
28
39 52
71 100 89
107
0 2010
2011
149
38 2012
INFRASTRUCTURE BONDS FUNDS FROM SALE OF SUBSIDIARIES' SHARES OWN CASH FLOW
98 2013
414
438
450
2016E
2017E
204
110 100
50 2014
2015E
BORROWINGS ON MARKET CONTRIBUTIONS TO CHARTER CAPITAL Source: Russian Railways, Gazprombank estimates
Who will build BAM? The first tender for construction of the Eastern Polygon was held in August 2014. It was won by a construction consortium consisting of Bamstroymekhanizatsiya, Setstroyenergo, Stroytrest and Transstroy-DV. The contract is valued at RUB 133.5 bln, including VAT (30% of the total cost). The contract provides for construction of 306 km of new railroad track and reconstruction of more than 230 artificial facilities, bridges and tunnels. The new tenders have yet to be announced. Russian Railways does not yet intend to bring in foreign contractors, including those from China.
Moscow-Kazan HSR: China is ready to invest Last year, it seemed that the Moscow-Kazan HSR was one of the infrastructure projects that would be put on hold until better times. With total declared investments reaching RUB 1.068 trln, only 40% was covered by specific sources of financing. However, China showed interest in the project: the country’s authorities at the end of last year unveiled a concept for creating the Silk Road Economic Belt (see below). Among other things, it calls for developing transportation channels from Asia to Europe, including through Russia.
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China has shown interest in the project: the country’s authorities at the end of last year unveiled a concept for creating the Silk Road Economic Belt
JULY 3, 2015
A memorandum on collaboration signed in early May 2015 between Russia and China calls for the HSR to be built by a company with capital owned by the Chinese Silk Road Fund (under the management of Asian Infrastructure Investment Bank (AIIB), which is being formed by China), which will contribute up to RUB 100 bln. A similar amount is to be invested by Russian authorities. In addition, Chinese banks are ready to allocate another RUB 250 bln. On the part of Russia, RUB 150 bln could be contributed by the NWF, about RUB 100 bln by the federal budget and Russian Railways, and about RUB 140 bln as an infrastructure bond issue that would be bought up by VEB. Thus, it remains unclear where the other RUB 330 bln would come from. Part of these funds could be contributed by Russian banks, while the cumulative part of pension savings would make it possible to boost the size of the infrastructure bond issue. Sources of financing, RUB bln
National Wealth Fund
150
Federal budget
21
Russian Railways budget
31
VEB pension savings via infrastructure bond issues
150
Silk Road Fund (HSR capital)
100
Chinese banks (borrowings)
250
Other unidentified sources
366
Total
1,068 Source: Interfax, Gazprombank estimates
The railroad is currently in the design stage. The tender was won by a RussianChinese consortium consisting of Mosgiprotrans, Nizhegorodmetroproekt and China Railway Eryuan Engineering Group. The total cost of the work to be carried out in 2016 is RUB 21 bln. It should take two years to build the railroad, which would be finished in 2018, although it seems to us that such a rapid construction period looks too ambitious. In any case, while the railway is in the design phase, the interested parties have time to discuss the details and figure out whether the Russian economy can handle such a big project. HSR construction in China and impact on the country’s economy The construction of an HSR would definitely have a positive economic impact on the expansion of any country’s economy. A considerable amount of economic research points to the agglomeration effect. The areas through which an HSR runs show heightened GRP growth averaging 0.5-0.7% per annum, while the household incomes of peripheral areas approach the higher income levels seen in large cities, a factor which promotes consumption. In addition, an HSR would develop tourism. Small regional companies have an incentive to speed up growth, which heightens the level of competition. Despite the advantages that HSRs offer the economy, the ROI offered by these railways remains questionable and requires detailed analysis. For example, there is an opinion that many HSRs in China are loss-making. The most successful project is the 1,318 km Beijing-Shanghai HSR, which was built in 2011 at a cost of $32 bln. In 2014, for the first time it generated net income ($192 mln), while total revenues reached $4.6 bln. In addition, the HSR was used by more than 100 mln passengers per year. The line is expected to have a payback period of 14 years.
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RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Export of Chinese HSRs China created the longest and most efficient HSR system in the world and has taken steps to export HSR construction services to other countries, particularly since the construction cost of HSRs in China is about half as much as in Europe. Aside from Russia, China is in talks on building HSRs with Mexico, Turkey, India, Thailand and other countries. To date, however, negotiations have been successful only with Turkey, where a Turkish and Chinese consortium is building a 533 km HSR between Istanbul and Ankara. The consortium consists of Railway Construction Corporation, China National Machinery Import and Export Corporation, as well as Turkish construction companies. The total cost of building the railway is about $4 bln. As part of this project, China has provided a $750 mln loan. This year, the Mexican government was forced to terminate a similar contract with China for the construction of a $3.7 bln HSR due to the decline in oil prices, which reduced budget revenues. The contract itself was stipulated in 2014 with China Railway Construction Corporation. All in all, 16 contenders placed bids at the tenders (including Siemens, Bombardier and Mitsubishi), but none of these companies were able to compete with China in terms of price. In addition, Export-Import Bank offered to provide 85% of project funding. Length of HSRs with allowed speed limit of more than 200 km/h CHINA EUROPE JAPAN TURKEY RUSSIA US 0
5,000 EXISTING
10,000
15,000
20,000
25,000
30,000
35,000
40,000
UNDER CONSTRUCTION/INTENDED Source: International Union of Railways
Highways: all resources for completion of current projects According to the Federal Special-Purpose Program entitled “Development of the Transport System of Russia until 2020”, the total amount of investment to be spent on expanding highway infrastructure is planned at RUB 2.7 trln ($47 bln at a RUB/USD rate of 55) or RUB 550 bln per year. This is 17.8% more than was spent over the past five years (2011-15), and assumes average annual growth of about 3.3%. However, the economic crisis has forced the government to decrease budget spending, including for the construction and repair of federal roads. This year, spending will be reduced by at least 10-15% of the earlier budgeted amount. So far, the government has not decided by how much spending will be decreased in subsequent years. One radical option would be to cut all expenditures by 5% in real terms. In 2015-16, the government had planned to boost spending on road infrastructure by 15-20% and the reduction will essentially return spending to the level seen in previous years — RUB 500 bln. The decrease in spending will likely prevent full-fledged reconstruction of such federal roads as M5 Ural (Moscow–Chelyabinsk), M7 Volga (Moscow–Ufa) and M8 (Moscow– Arkhangelsk). All funds will be concentrated toward completing the construction of current projects of which state concern Avtodor is in charge: the Moscow–St. Petersburg toll
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China created the longest and most efficient HSR system in the world and has taken steps to export HSR construction services to other countries, particularly since the construction cost of HSRs in China is about half as much as in Europe.
JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
highway and the Central Ring Road around Moscow, which should be completed by 2018. The reconstruction of M4 Don (Moscow–Novorossiisk) will likely continue. A major road project in future years will be the construction of a bridge across the Kerch Strait, at an estimated cost of over RUB 200 bln. The structure and bulk of funds will come from the federal budget and the NWF. This project should consume funding from other sources. We estimate total spending on federal roads at 0.5% of GDP over the next five years (RUB 500-600 bln) vs. 0.7% for the previous five years. In addition, consolidated spending of regional budgets to support regional roads, including Moscow, account for another 0.6% of GDP (RUB 600-700 bln) vs. 0.9% for the previous five years. Thus, total budget spending on road infrastructure will decline to 1.1% in 2016-20 vs. 1.5% in 2011-15. This is a moderate level of expenditure, which will make it possible to gradually improve road infrastructure and implement several large-scale projects. However, it will not allow infrastructure to expand at a pace exceeding overall growth of the economy. Dynamic of costs for road infrastructure development, RUB bln
Structure of costs for road infrastructure development, 2016–20
800
12%
60%
4% 2%
600
FEDERAL BUDGET SPENDING SUBSIDIES TO AVTODOR
400
OTHER SUBSIDIES
200 22%
0
NATIONAL WELFARE FUND
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 FEDERAL BUDGET SPENDING OTHER SUBSIDIES NON-BUDGET SOURCES
NON-BUDGET SOURCES
SUBSIDIES TO AVTODOR NATIONAL WELFARE FUND
Source: Federal Target Program “Development of Transport System of Russia”, Gazprombank estimates
Source: Federal Target Program “Development of Transport System of Russia”, Gazprombank estimates
Program for building and reconstruction of major federal highways INVESTMENTS IN 2011–2015, RUB MLN
INVESTMENTS IN 2016–2020, RUB MLN
SHARE OF TOTAL INVESTMENTS
М5 Ural Highway (Moscow – Chelyabinsk)
66,287
227,575
14.14%
М11 Moscow – St. Petersburg (toll highway)
157,917
205,971
12.80%
М7 Volga Highway (Moscow – Ufa)
45,356
152,448
9.47%
М051, М053, М055 Baikal Highway (from Chelyabinsk through Kurgan, Omsk, Novosibirsk, Kemerovo, Krasnoyarsk, Irkutsk, Ulan-Ude to Chita)
18,159
144,065
8.95%
М060 Ussuri Highway (Khabarovsk – Vladivostok)
29,207
111,979
6.96%
М4 Don Highway (from Moscow through Voronezh, Rostov-on-Don, Krasnodar to Novorossiysk)
126,159
107,875
6.70%
М56 Lena Highway (from town of Never to Yakutsk)
39,751
93,324
5.80%
М8 Kholmogory Highway (from Moscow through Yaroslavl, Vologda to Arkhangelsk)
43,305
88,547
5.50%
М1 Belarus Highway (from Moscow to the border with Belarus)
45,015
87,424
5.43%
М03 Ukraine Highway (from Moscow through Kaluga, Bryansk to the border with Ukraine)
11,104
52,349
3.25%
Central Ring Road (Moscow region)
29,857
50,368
3.13%
М29 Caucasus Highway (from Krasnodar though Grozny, Makhachkala to the border with Azerbaijan)
31,677
46,171
2.87%
St. Petersburg – Petrozavodsk
33,732
40,403
2.51%
Moscow-Nizhny Novgorod-Kazan high-speed railway
3,160
37,033
2.30%
М6 Caspian Highway (from Moscow through Tambov and Volgograd to Astrakhan)
7,138
35,929
2.23%
Amur Highway (Chita – Khabarovsk)
3,380
29,211
1.82%
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RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
М20 St. Petersburg – Pskov – Pustoshka – Nevel (to the border with Belarus)
5,671
26,230
1.63%
Kolyma Highway (from Yakutsk to Magadan)
17,973
25,831
1.61%
М10 Russia (from Moscow to St. Petersburg)
11,346
25,141
1.56%
Total
726,194
1,587,872
99%
Source: Federal Target Program “Development of Transport System of Russia”
Creation of heavy truck toll system Several years ago, the government decided to establish a truck toll system in Russia for vehicles in excess of 12 tonnes that travel on federal roads. The point is that wear and tear of roads increases because of heavy vehicles and requires repair. The system would generate additional revenues that would be contributed to the road fund. The creation and management of the system was granted on a concession basis to RT-Invest Transportation Systems. The concessionaire must create a system that will service 50 km of federal roads and record the movement of around 1.6 mln trucks. The overall cost of its creation is RUB 25.6 bln (excl. VAT). The IRR of the project is estimated at 12%, with a payback period of eight years. The project will mainly be financed through borrowed funds provided by Gazprombank. Following the launch of the system, the owners of freight vehicles will pay a tariff of RUB 3.7/km, indexed to inflation. Collections are estimated at RUB 50 bln per year, equivalent to around 10% of Federal Road Fund revenues.
GK Avtodor: an efficient vehicle for investors in road concessions Over the past several years, GK Avtodor has done a huge amount of work, practically from scratch, to create large-scale concession projects in the roads segment and to attract investors. Its main achievements over the past two years include the following:
The successful organization within tight time frames of four tenders to construct segments of the MKAD (I, II, IV and V). For segments I and V, a contract was signed with the winner and construction is underway. Tenders for segments III and IV will be conducted in September 2015.
The holding of new tenders to construct segments of the Moscow – St. Petersburg highway. In 2014, a contract was signed with a consortium of VTB and Vinci to construct segments 7 and 8 of the road (543-684 km) at a cost of RUB 77 bln. Preparation is underway for tenders to construct segments 2 and 3 (58-149 km and 149-208 km). In December 2014, the first toll segment of the road (15-58 km) was launched (exiting to Moscow through Sheremetyevo airport).
The holding of tenders and the signing of contracts to reconstruct segments of the M4 Don and M3 Ukraine roads, each at a cost of RUB 17 bln. Documents are being prepared to hold tenders to reconstruct the M7 (Balashikha bypass) and M1 (Belarus) roads.
The preparation of a presentation is underway for regional concession projects in Tatarstan, Bashkortostan and Novosibirsk.
Despite the large volume of work and tight time frames for construction, a large number of investors (usually 3-4 consortiums) are taking part in Avtodor’s tenders, which underscores the high investment attractiveness of the projects.
The tenders have been organized on a quality basis. For each tender, the corporation prepares detailed technical, financial and legal documentation, which allows investors to quickly and efficiently value a project’s attractiveness.
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RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
GK Avtodor’s budget: need for private investment totals around $500 mln annually According to the Federal Target Program (FTP), GK Avtodor’s budget in 2016-20 should amount to around RUB 1 trln (RUB 200 bln per annum), although the corporation itself forecast its budget at nearly 30% less — RUB 732 bln. Half of the budget is in the form of direct subsidies from the federal budget. Additional funds from the National Wealth Fund — RUB 150 bln — will go toward construction of the TsKAD by 2018. In addition, GK Avtodor plans to issue bonds in a total amount of RUB 89 bln until 2020. Proprietary and borrowed funds of the concessionaire and investors must total RUB 186 bln (22% of the planned amount) or around RUB 30 bln per annum. Of this amount, around 70% (RUB 25 bln) may be attracted by the concessionaire in the form of borrowed funds (bonds and bank loans), while 30% (RUB 5 bln) should be comprised of the concessionaire’s own funds. The peak of investment in GK Avtodor’s projects will occur in 2016-18 for construction of the Moscow – St. Petersburg toll road and the TsKAD, which should be completed by 2018 in time for the World Football Championship to be held in Russia. Therefore, despite the economic crisis, these projects will be financed in full. Dynamics and sources of financing for GK Avtodor’s projects, RUB bln
Financing structure of GK Avtodor’s projects (2015–20)
250 22%
200 35 20
40
100
50.9
27
50 0
39 2015
35.7 75 2016
SUBSIDIES FROM THE BUDGET
57
150 17 38.4
49%
56 2017
NATIONAL WELFARE FUND
34 25.0
27 8
11
79
78
75
2018
2019
2020
11%
FUNDS FROM CONCESSIONAIRES AND INVESTORS AVTODOR'S FUNDS (MARKET BOND) NATIONAL WELFARE FUND SUBSIDIES FROM THE BUDGET
AVTODOR'S FUNDS (MARKET BOND)
18%
Source: GK Avtodor
FUNDS FROM CONCESSIONAIRES AND INVESTORS
Source: GK Avtodor
Road concessions in Russia offer solid ROI In GK Avtodor’s projects, the share of budget financing totals 60-90%, while that of investors comprises 10-40% of required investment. The structure of financing depends on the operational investment attractiveness of a given project. The higher the expected automobile traffic, the lower the operational risks, the more attractive the project is for private investors and the larger their share in the project. The majority of GK Avtodor’s projects are concluded based on the terms of a long-term investment agreement which assumes that GK Avtodor will take operational risks (risk of traffic density), while private investors are offered a guaranteed return on own and borrowed investment in the amount of “inflation +4-8%”. The period of the concession is 23-30 years. There are also concession projects with direct collection of tolls, by which a concessionaire receives all of the revenues of a project from automobile traffic, while assuming risks of traffic variability. Such projects offer higher returns amid greater operational risk. In our view, the proposed return on GK Avtodor’s concession projects is extremely attractive for investors. By comparison, the current premium for investment in Russian equities stands at 8-10%, while the risk level for equities is higher than for road concessions. Moreover, the risk premium for investing in equities will decline as geopolitical risks subside. The historical risk premium for investing in equities is 4-5% compared to 4-8% for road concessions. Admittedly, when tenders are held, a decline in ROI requirements for own and borrowed funds is one of the criteria for winning tenders.
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RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Despite the fact that interest rates and inflation in Russia are very high at present, they are gradually declining. There is a high likelihood that within a few years, inflation indicators and the level of interest rates will decline to historically low levels. For example, the CBR has set its inflation target at a level of 4% by 2017. Tenders planned for 2015 MOSCOW–ST. PETERSBURG TOLL HIGHWAY Road section
15–58 km
58–149 km
149–208 km
208–258 km
258–334 km
334–543 km
543–684 km
43
90
59
47.9
72.7
217.1
137.5
77,000
30,000
n/a
26,800
12,000–15,000
15,500–17,000
16,000–255,00
55.8
71.9
n/a
30.88
49.6
144.6
76.8
Direct payments concession
Long-term investment agreement
n/a
Long-term investment agreement
Long-term investment agreement
Long-term investment agreement
Availability payment concession
Current status
Launched
Preparing for the tender (in 2016)
n/a
Under construction
Launched
Under construction
Under construction
Investor/tender participant
North-West Concession Company (50% Mostotrest, 50% Vinci)
n/a
Mostotrest
Mostotrest
Mostotrest
Two Capitals Highway
2016-2018
2015–2017
2012–2014
2015–2017
2015–2017
23
23
28
27 75%/25%
Length, km Expected traffic, cars per year Price, RUB bln (including VAT) Agreement
Construction period Timeline for concession Sources of financing (public/private) Private investor’s ROE
2011–2014
2016–2018
26
24
40%/60%
80%/20%
85%/15%
90%/10
90%/10%
89%/11%
CPI+8.5%
CPI+8.5%
CPI+8.5%
CPI+8.5%
CPI+8.4% (4.55%+3.85%)
n/a
Source: GK Avtodor, Gazprombank estimates
CENTRAL RING ROAD Road section Length, km Expected automobile traffic, per year Agreement Price, RUB bln (including VAT) Current status Investor/tender participant Timeline for construction Timeline for concession Sources of financing
Private investor’s ROE
Start-up facility №3
Start-up facility №4
105.3
Start-up facility №5 96.5
Start-up facility №1
76.44
49.5
34,100
21,300
26,600
33,100-39,500
Availability payment concession
Availability payment concession
Long-term investment agreement
Long-term investment agreement
80.5
79.8
42.2
52.39
Tender results to be announced soon
Tender results to be announced soon
Under construction
Agreement signed
North-East Mainline, Sok 24 Russia, Invest Finance, Road Building Corporation
South-East Mainline, Capital’a Big Ring, Invest Finance Plus, Road Building Corporation
Koltsevaya magistral (100% subsidiary of ARKS)
Stroygazconsulting
2016–2018
2016–2018
2014–2018
2014–2018
30
30
24
23
National welfare fund (32%), subsidies from federal budget (25%), private investors (~40%).
National welfare fund (55%), subsidies from federal budget (7%), private investors (~38%).
Public finance (89%), private finance (11%)
Public finance (87%), private finance (13%)
12-13% IRR
n/a
CPI+4.65%
CPI+8.30%
Source: GK Avtodor, Gazprombank estimates
Long-term strategy: 12,000 km of highways Aсcording to the long-term strategy for the development of GK Avtodor’s highway network, 12,000 km of highways will be under the company’s management by 2030. Out of the total, 6,000 km of roads will be built and 2,000 km will be renovated. The share of toll roads will account for 75% of the entire network.
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RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
GK Avtodor’s long-term targets, mln RUB 2010–20
BY 2030
Total investments *
1,569,130
4,650,000
Including subsidies from the federal budget
1,012,487
2,092,500
556,643
2,557,500
20
80
3,994
12,000
894
2,000
1,333
6,000
47%
75%
133
289–380
46
125–165
Non-budget financing Range of investment projects Expected total length of highways under trust management by 2020, km Automobile roads to be restored, km Automobile roads to be built, km Share of toll roads of the entire network Capacity of market of GK Avtodor’s construction and assembly works, RUB bln per year Including the capacity of private finance market
Source: GK Avtodor * 2010 prices
Highway network under GK Avtodor’s management by 2030 11
1
M-1 “Belarus”
7
M7A “Moscow–Nizhny Novgorod–Kazan”
St. Petersburg
2
M-3 “Ukraine”
8
Kazan–Yekaterinburg
Veliky Novgorod
3
M-4 “Don”
9
Yekaterinburg–Omsk–Kazakhstan border
4
M-11 “Moscow–St. Petersburg”
10
Southwest Chord
5
Central Ring Road
11
“Scandinavia” automobile road
6
Novorossiysk Transport Hub
12
Krasnodar–Abinsk–Kabardinka
Road transport bridge Through Kerch Strait
13
6а
Kazan–Shali–Bavly–Kazakhstan border
14
Ozinki–Saratov–Voronezh–Kursk –Belarus border
15
Chelyabinsk–Yekaterinburg
16
Sochi–seaport “Kavkaz”
4 1
Smolensk
5
Tver
Moscow
2
Vladimir
Bryansk
7 Nizhny Novgorod
Yelets
14
Voronezh
3
Kazan
14
8
10 Saratov
6а Kerch Novorossiysk
Yekaterinburg
15
Rostov-on-Don
13
6 12 Krasnodar
16
Chelyabinsk
Volgograd
Tyumen
9
Orenburg Omsk
Sochi
Automobile roads and high-speed highways transferred under the trust management of the State Company Russian Highways (GK Avtodor); roads under construction to be launched by 2020.
Projected automobile roads and high-speed highways by 2030 Source: GK Avtodor
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RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Russia’s seaports: state support, growth of cargo turnover and high profitability Russia has 63 cargo seaports with total capacity of 860 mln tpa. Regardless of the economic situation in the country, the cargo turnover of Russian seaports has been growing steadily each year. Over the past 10 years, turnover has increased by 67% to 623 mln tonnes in 2014. That said, devaluation supported exports of raw materials, which has resulted in higher cargo turnover. In 2014, such turnover rose 5.8% and in 1Q15 the growth rate accelerated to 8.9%. Export goods (mainly crude oil, oil products, and coal) account for 80% of the total cargo turnover of Russian seaports, which reflects Russia’s commodities export-led economy — 100% of grain, around 80% of oil, and 75% of coal exported from Russia is shipped via seaports. Imports account for just 9% of total turnover (cars, containers with equipment, consumer goods, and car parts). The remaining amount of cargo accounts for transit cargoes and cabotage.
64% 62% 60% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 CAPACITY, MLN T CAPACITY UTILIZATION, %
CARGO TURNOVER, MLN T
30% 20% -1.2% 10% 0% -10% -20% -30% -40% PRIGORODNOYE
66%
-30.3% TUAPSE
68%
5.3%
-15.8%
NAKHODKA
70%
7.9%
VANINO
72%
10.1% 12.5%
19.7%
MURMANSK COMMERCIAL SEAPORT
74%
24.9% 20.7%
VOSTOCHNY PORT
160 140 120 100 80 60 40 20 0
BIG PORT ST. PETERSBURG
76%
PRIMORSK
845 860 791 829 761 699 731 630 591 589 623 549 535 566 496 526 451 455 407 421
NOVOROSSIYSK
1,000 900 800 700 600 500 400 300 200 100 0
Russia’s 10 largest seaports by turnover
UST-LUGA*
Dymamic of cargo turnover in Russian seaports, mln tonnes
CAPACITY, MLN T CARGO TURNOVER, MLN T (2014) CARGO TURNOVER DYNAMIC YOY * by 2020, the seaport’s capacity will increase to 150 mln tonnes
Source: Association of Sea Commercial Ports, Gazprombank estimates
Source: Transportation Ministry, Gazprombank estimates
Structure of Russian seaport cargo turnover, 2014
Russia’s seaport cargo turnover, 2014 19% 7%
79%
4%
7%
5%
20% 623 MLN T
623 MLN TONNES
8%
2% 1% 1% 11%
6% 30%
EXPORTS
IMPORTS
TRANSIT CARGOES
OIL CONTAINERS FERTILIZERS OTHER
CABOTAGE
Source: Association of Commercial Sea Ports
OIL PRODUCTS FERROUS METALS ORE
COAL GRAIN TIMBER
Source: Association of Trade Sea Ports
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Russian seaport cargo turnover breakdown 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2010 OTHER FERROUS METALS
2011 TIMBER CONTAINERS
2012 ORE COAL
2013
2014 FERTILIZERS OIL PRODUCTS
2015П GRAIN OIL
Source: Association of Trade Sea Ports
Under the Federal Target Program for 2016-20, investment in seaport infrastructure is planned at around RUB 280 bln. The government will contribute 30% of the total sum, while the remaining 70% will come from private investors. However, in our opinion, the actual investment amount could be half of that expected — about RUB 140 bln (RUB 28 bln or $0.5 bln per year). Some core projects have already been launched, such as the expansion of capacities of Ust-Luga and Big Port St. Petersburg, and the construction of Sabetta and Novoportovoye ports in the Yamal peninsula. At the same time, projects such as the expansion of capacity of Taman seaport on the Black Sea, construction of a universal deepwater port in the city of Baltiysk (Kaliningrad region), and expansion of capacities of coal terminals at Vanino seaport in the country’s Far East are planned under the target program, but their implementation is in question. Planned investment in extension of Russia’s seaport infrastructure, RUB bln
Sources of funding for seaport infrastructure, RUB bln
100
90 80
80
70 60
60
50 40
40 30
20
20 10
0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
ACCORDING TO FEDERAL SPECIAL-PURPOSE PROGRAM
STATE BUDGET
GAZPROMBANK ESTIMATES Source: Federal Special-Purpose Program, Gazprombank estimates
PRIVATE INVESTMENTS Source: Federal Special-Purpose Program
The mechanism of public-private partnership is most commonly used for the construction of seaport infrastructure… The government is investing in preparation works in the water area of the port — bottom-dredging works, building of approach channels and moorage walls, and construction of access routes to the port. Private investors (stevedores) invest in the construction of cargo terminals (funds are used for storage facilities, sheers, loading machines). For example, the government fully financed the “water part” of Sabetta and 18
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Novoportovoye seaports, which are currently under construction in the Yamal peninsula, while private investors — Yamal-LNG and Gazprom Neft — are now building the cargo terminals (in other words, the landside part of these projects). In some instances, private investors take part in the construction of the “water part” of seaport infrastructure. … but a concession agreement mechanism that is widespread in other countries is not yet used in Russia The reason for this is that stevedores usually own the land plots on which cargo terminals are located (or rent them for long periods at a relatively low price). However, in other countries (i.e. Greece, the Netherlands, UAE) land plots for the construction of seaport infrastructure are assigned to the operator under concession agreements. Due to low payments for land, Russian stevedores show higher margins than their foreign peers with similar types of cargo turnover. For example, the EBITDA margin of sea grain terminals can reach 80%, and the margin of container terminals can approach 60%. Oil and petrochemical terminals show a margin of around 40-50%. Coal terminals stand apart, as most of them are controlled by coal producers (Mechel, Kuzbassrazrezugol, SDS-Ugol). These terminals show lower margins, which is not surprising given the fact that high transportation costs are factored into the sales price. Hence, full control over the coal transportation chain is an important part of coal producers’ business. EBITDA margin of Russian and overseas stevedores, 2014 61%
61% 55%
60%
54%
52%
50%
47%
25%
30%
23%
22%
PERAEUS PORT AUTHORITY (GREECE)
36%
40%
DALIAN PORT (CHINA)
70%
20% 10% HHLA (GERMANY)
ST PETERSBURG SEAPORT (UNIVERSAL)
DP WORLD (UAE)
TUAPSE COMMERCIAL SEAPORT (UNIVERSAL)
COSCO PACIFIC (CHINA)
VOSTOCHNY PORT (COAL)
GLOBAL PORTS (CONTAINER)
NCSP GROUP (UNIVERSAL)
0%
Source: companies, Bloomberg, Gazprombank estimates
Despite high margins, the construction of seaport infrastructure is a capital-intensive business. Globally, the average return on capital invested in this segment reaches 12-15%. In Russia, it is more difficult to calculate the ROI in seaport assets, as most new projects are implemented by raw materials companies in order to improve the efficiency of their logistics operations and gain control over transportation costs.
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Largest projects to construct port capacities Projects currently in active construction Projects in initial stage or prospective projects Russia’s largest seaports
PRIMORSK MURMANSK UST-LUGA BRONKA
3
SABETTA
1
2 St. Petersburg
4 BIG PORT ST. PETERSBURG
SAKHATRANS
NOVOPORTOVOYE
Moscow
11
VANINO
7 TAMAN
5
PRIGORODNOY E VLADIVOSTOK
OLYA NOVOROSSIYSK
6
9
Astrakhan
10
Vladivostok TUAPSE
OTKRYTYI
ZARUBINO
8 NAKHODKA
VOSTOCHNY
Source: Gazprombank estimates
Largest port infrastructure projects Projects currently in active construction phase LOCATION DESCRIPTION ON MAP
SEAPORT CATEGORY
TOTAL AMOUNT OF INVESTMENT, RUB BLN
INVESTORS
PROJECTED SEAPORT CAPACITY, MLN TONNES
REALIZATION TIMELINE
1
Construction of UstLuga port
Multi-purpose seaport
61.5
Kuzbassrazrezugol, Global Ports, Gunvor, NOVATEK, SIBUR, Eurochem, OMK, Gazprom and others
180
2000-20
2
Construction of Sabetta port, including building of entrance channel in the Gulf of Ob
LNG terminal
73.2
Yamal LNG (NOVATEK, Total, CNPC)
16.5
2012-20
3
Construction of marine multi-purpose Container and handling terminal RoRo terminals Bronka in St Petersburg seaport
59.6
Holding Company Forum (St. Petersburg)
1.9 (TEUs)
2012-2017
4
Year-round oil terminal Novoportovoye (Yamal)
10.9
Gazprom Neft
8.5
2013-18
Oil terminal
Source: Federal Special-Purpose Program, Gazprombank estimates
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LOCATIONS ON THE MAP
DESCRIPTION
1
Universal Ust-Luga port is one of the largest-scale transport infrastructure projects since the dissolution of the Soviet Union and a successful case of private-public partnership. Seaport construction kicked off in 1999. It is located 70 km from St. Petersburg in the Gulf of Finland. The location is convenient for servicing deepwater vessels and allowing year-round navigation. State and private investments over 10 years totaled around $7 bln. The port’s cargo turnover in 2014 reached 75 mln tonnes (+34% YoY). By 2020, the seaport capacity is expected to extend up to 180 mln tonnes. Proprietary cargo terminals were constructed inside the port by many Russian companies, including Kuzbassrazrezugol (coal), Global Ports (container terminal), NOVATEK (LPG terminal), Eurochem (fertilizers), Rusal (aluminum and alumina), OMK (steel) and Gunvor (oil products). Gazprom intends to construct an LPG terminal inside the port.
2
Construction of the new Arctic Sabetta port in Yamal began in 2012. Sabetta is the cornerstone infrastructure facility of the Yamal-LNG project, developed by NOVATEK, Total and CNPC, which includes LNG production, as well as storage and shipping capacities based on Yuzhno-Tambeiskoye gas field resources. The project is expected to be completed in 2017.
3
Construction of a multi-purpose loading complex is currently underway at Big Port St. Petersburg. The initial stage (2015) implies commissioning of a container terminal with annual capacity of 1.45 mln TEU, as well as the Ro-Ro terminal of 260,000 units of equipment per annum. The second stage (2017) proposes extension of container terminal capacities up to 1.9 mln TEU per annum and construction of a logistics hub, while the third (2022) includes construction of a container terminal with annual capacity of 3 mln TEU. Bronka’s remoteness from other cargo terminals of St. Petersburg seaport provides it with a number of competitive advantages: readiness to service large-displacement type container ships, convenient transportation logistics as well as pilotage. That said, commissioning of rather large container capacities creates overcapacities in the Northwest Region.
4
In 2015, Gazprom Neft will launch a year-round oil terminal in the Yamal peninsula in the Gulf of Ob intended for oil exports from Novoportovskoye field to Europe. The Gulf of Ob, where tanks are loaded with oil, is the first zone of the Northern Sea Route and is covered with ice for nine months per year. Regular operation of tanks requires the use of nuclear-powered icebreakers for a distance of around 400 km. Source: Federal Special-Purpose Program, Gazprombank estimates
Projects in initial stage and prospective facilities LOCATION DESCRIPTION ON MAP
SEAPORT CATEGORY
TOTAL AMOUNT OF INVESTMENT, RUB BLN
INVESTORS
PROJECTED SEAPORT CAPACITY, MLN TONNES
REALIZATION TIMELINE
93.8
2011-20
5
Development of Taman seaport
Universal port
25.0
Gazprom, Eurochem, Uralkali, SUEK, Metalloinvest, United Grain Company (OZK), Global Ports
6
Construction of oil handling terminal and bulk cargo handling complex in the Olya seaport (Astrakhan region)
Universal port
19.7
Olinskiy petrochemical terminal, Olya commercial seaport, Olya bulk terminal
3
2015-18
7
Construction of a coal terminal at Vanino port
Coal terminal
19
ZAO TEPK
15
2015-2018
8
Construction of handling terminals in Zarubino seaport (Big Seaport Zarubino)
Universal port
180.0
Summa/China Merchants Holding Int. (CMHI)
60
2015-22
9
Construction of port terminal for LNG plant near Vladivostok
LNG plant
n/a
Gazprom
15
2014-22
10
Construction of a coal terminal near Otkrytyi Cape (Primorsk region).
Coal terminal
50.0
Rostec/Shenhua (China)
20
2015-19
11
Sakhatrans
Coal terminal
n/a
Volga Group
12
n/a
Source: Federal Special-Purpose Program, Gazprombank estimates
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LOCATION ON THE MAP
DESCRIPTION
5
The government is currently developing the expansion of seaport capacities in order to raise cargo turnover (coal, fertilizers, ore) partially transported via Ukrainian ports. Negotiations are underway with private investors who are ready to build proprietary cargo terminals, including Global Ports, UCL Ports, SUEK and Metalloinvest. Should the project enjoy decent demand from cargo shippers, its capacities would be lifted to 70 mln tonnes by 2020 and to 100 mln tonnes by 2030. Total intended capex exceeds RUB 200 bln, while the updated version of the Federal Special-Purpose Program specifies the total amount of planned investment at just RUB 25 bln.
6
Mechel planned a major expansion of the capacities of Vanino port, which specializes in coal exports. However, given the company’s poor financial position, the capex program has yet to be implemented.
7
Summa plans to build Big Port of Zarubino in the Trinity Bay, located 18 km from the Chinese border, by 2018. Cargo turnover is expected to total 60-100 mln tpa, with a major volume to come via transit from northern to southern Chinese provinces. The port will handle grain (about 10 mln tpa), containers (up to 2 mln TEU pa), general and bulk cargo (up to 35 mln tpa), Ro-Ro-cargo, etc. The value of the project inclusive of rail and road infrastructure as well as a dry port in near-border Hunchun is estimated at $3.0-3.5 bln. Project works are expected to start in February 2015. CMHI, established in Hong Kong in 1992, is the largest asset of the state-owned China Merchants Group (controls 55% shares, while the remaining 45% belongs to Goldman Sachs). CMHI operates in 7 of the 10 largest Chinese container ports.
8
Gazprom is considering a project to build an LNG terminal in the Russian Far East, but a final decision has yet to be made.
9
In 2014, Rostec and Chinese corporation Shenhua signed a memorandum to start works on joint exploration of the Ogodjinskoye coal deposit, located in Amur region, and to build a coal sea transshipment terminal with 20 mln tonne capacity at Port Vera in Primorsk region. Engineering of the port’s facilities is nearing completion. Total investment in port construction is estimated at $1 bln. Implementation of the project would allow to considerably expand access for Russian coal companies to ATP distribution markets.
10
Volga Group, owned by Gennady Timchenko, controls 89% of Sahattrans LLC, with the latter owing around 200 ha of land in the vicinity of Vanino Port. The company plans to build a transshipment terminal for coal and iron ore concentrate with annual capacity up to 12 mln tonnes. The terminal is expected to transship coal from the company Colmar. Source: Federal Special-Purpose Program, Gazprombank estimates
Chinese investors in port assets outside the country Chinese ports top the list of the world’s largest ports in terms of cargo turnover, the structure of which is dominated by containers, coal, ore and petrochemical products. The shares of the largest port operators trade on the Shanghai and Hong Kong stock exchanges, while the major shareholders of most Chinese stevedore companies are central and local governments. In recent years, large Chinese port operators have been actively buying assets in other countries, including purchases under concession agreements. Primarily, Chinese investors are interested in container terminals, as such acquisitions would allow them to expand their own business and improve the efficiency of container logistics. Chinese companies own container terminals in several European ports (the Netherlands, Belgium and Greece), Sri Lanka, Nigeria and Israel. Top investors in port assets outside China CHINESE PORT OPERATORS
PORT ASSETS OUTSIDE CHINA
Shanghai International Port
25% in Zeebrugge port (Belgium), New Haifa Port (Israel)
China Merchants Holdings
Nigeria-based container terminal, 85% in Colombo International Container Terminal (Sri Lanka)
Cosco Pacific
Container terminals located in Belgium (49%) and Greece (100%) Source: Gazprombank estimates
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Airports: the fastest growing segment in Russian transport infrastructure Over the past five years (2010-14), passenger traffic in Russian airports has risen by 56 mln to 150 mln (+60%, average annual growth rate of 10%). Even during the recessionary 2015, we do not expect a decline in passenger traffic, as the population will shift its focus from traveling abroad to domestic tourism. Fast-growing demand for quality airport services makes investment in airport infrastructure highly lucrative. This segment of transport infrastructure is undergoing the most active process of reformation and modernization, privatization and formation of concessions. Key sector-wide trends:
Consolidation of federal airport assets. The consolidation is aimed at uniting into holdings multiple public and private companies, as well as providers of services for operation of the largest federal airports – Sheremetyevo and Vnukovo (Domodedovo airport, being 100% privately held, does not participate in the consolidation). The consolidation will result in controling stakes being transferred to private investors, while the state will become a minority stakeholder. As for Sheremetyevo, the controlling stake is planned to be handed to Sheremetyevo Holding, the beneficiaries of which are Arkady Rotenberg, Alexander Ponomarenko and Alexandr Skorobogatko. Control over Vnukovo is expected to be transfered to Vnukovo-Invest, the beneficiaries of which are several Russian businessmen.
Transfer to private ownership of airfield infrastructure at Moscow Aviation hub airports based on concession. According to federal law, runways, taxiways and appron areas can only be publicly held. Therefore, there is only a single source of investment in their modernization – the state budget. Their transfer to a concession will help facilitiate private investment while easing the burden on the state budget.
Regional airports are transferred into regional property and become subjects for privatization. In recent years, Perm, Irkutsk, Krasnoyarsk and Sakhalin airports were transferred from state to regional ownership. Regional authorities are more activily seeking to attract private investors in the airports’ development, helping to ease the burden on the federal budget as well.
During 2016-20, around RUB 300 bln is expected to be invested in airport infrastructure – in line with the previous five years’ spending. Private investment accounts for 40% (RUB 130 bln) The planned amount of investment in airport infrastructure remains almost flat compared with the previous versions of the Federal Special-Purpose Program, as airport congestion coupled with the task of hosting the 2018 World Football Championship in 11 cities requires timely funding. Extension of Sheremetyevo airport remains the largest investment pipeline: construction of a third runway financed with the help of the state budget as well as the B terminal with an underground crosswalk between the northern and the southern parts of the airport (construction is privately funded), while the Federal Special-Purpose Program currently lacks investment for construction of a third runway at Domodedovo. The runner-up in terms of the scope of investment is the Yuzhny airport based in Rostov-on-Don. Yuzhny is valued at around RUB 37 bln, half of which is financed through the federal budget, with the other half to be financed through private investment provided by Airports of Regions holding, owned by holding company Renova. Ample investment will be directed toward modernization of regional airports in Tyumen, Novosibirsk, Yakutsk, Khabarovsk, Kaliningrad, Nalchik, Surgut, Murmansk, Chelyabinsk and Saratov.
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Total investment in airport infrastructure, RUB bln 90 80 70 60 50 40 30 20 10 0 2010
2011
2012
2013
2014
2015
STATE BUDGET
2016
2017
2018
2019
2020
PRIVATE INVESTMENTS Source: Federal Special-Purpose Program, Gazprombank estimates
Largest investment pipelines, RUB bln, 2016-20 CONSTRUCTION OF 3RD RUNWAY AT SHEREMETYEVO UZHNY AIRPORT CONSTRUCTION (ROSTOV-ON-DON) AIRPORT CONSTRUCTION IN IRKUTSK RECONSTRUCTION OF ROSHCHINO AIRPORT (TYUMEN) RECONSTRUCTION OF TOLMACHEVO AIRPORT (NOVOSIBIRSK) RECONSTRUCTION OF 2ND RUNWAY AT YAKUTSK AIRPORT RECONSTRUCTION OF NOVY AIRPORT (KHABAROVSK) RECONSTRUCTION OF KHRABROVO AIRPORT (KALININGRAD) RECONSTRUCTION OF DOMODEDOVO AIRPORT AIRPORT CONSTRUCTION (NALCHIK) RECONSTRUCTION OF SURGUT AIRPORT RECONSTRUCTION OF NOVY URENGOI AIRPORT RECONSTRUCTION OF MURMANSK AIRPORT CONSTRUCTION OF AN AIRPORT IN SARATOV RECONSTRUCTION OF CHELYABINSK AIRPORT
0.00
10.00
20.00
30.00
40.00
Source: Federal Special-Purpose Program, Gazprombank estimates
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Construction of Yuzhny airport in Rostov-on-Don Rostov-on-Don’s existing airport is Russia’s ninth-largest in terms of passenger traffic (2.4 mln). However, it is located in the city center with serious restrictions for further development. This was the reason behind the construction of a new airport called Yuzhny, the completion of which should occur in 2017 – before the 2018 World Football Championship. The new complex is expected to fully replace the old one while providing grounds for the creation of a modern centralized airport hub in southern Russia with annual throughput capacity of up to 8 mln passengers. The total 2 space of the new passenger terminal should exceed 50,000 m , with throughput capacity of 2,000 passengers per hour. The runway will have a length of 3,600 m, enabling all types of aircraft to land. This airport construction project is being developed by Rostovaeroinvest, in which Airports of Regions Holding has a controlling stake. The project was among the first included in the state program of support for Russian investment projects, allowing the raising of privileged funding at a rate of 11.5% p.a. This is much lower than current market rates. The project is valued at RUB 37.2 bln, of which RUB 17.9 bln will come from the state budget. Gazprombank has originated a RUB 15.7 bln loan to fund implementation of this project. Mostotrest subsidiary Transstroymekhanizatsiya will undertake to construct airfield infrastructure. A subcontractor for the terminal has yet to be announced.
Design of new terminal at Yuzhny airport
Source: Airports of Regions
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RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
A group of Russian strategic investors in airport infrastructure is being formed Apart from the state, which remains the largest owner of Russia’s airports, the list of private strategic investors includes Basel-Aero, Airports of Regions (state corporation Renova), Novaport and Aero-Invest. Airport privatization is within the scope of Rostec’s interests as well. Passenger traffic in airports, mln 60%
150
50%
120
40%
90
REGIONAL AIRPORTS
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
10% 1999
0 1998
20%
1997
30
1996
30%
1991
60
SHARE OF MOSCOW AVIATION HUB, %
Source: Federal Special-Purpose Program, Gazprombank estimates
Market shares of airport operators, 2014 (total passenger traffic, mln and %) SHEREMETYEVO (STATE)
32, 20%
35.22%
DOMODEDOVO (EAST LINE) VNUKOVO PULKOVO (NORTHERN CAPITAL GATEWAYS)
3, 2%
NOVAPORT
11, 7% AIRPORTS OF THE SOUTH
8, 5%
33, 21% 9, 6%
AIRPORTS OF REGIONS AEROINVEST
14, 9%
13, 8% OTHER (STATE-OWNED AIRPORTS) Source: company data, Gazprombank estimates
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Major investors in Russian airports INVESTORS/SHAREHOLDERS
State authorities
AIRPORTS Federal and regional authorities
Sheremetyevo (state’s stake – 83.4%)
PASSENGER TRAFFIC, MLN, 2014 31.57
Kazan, Ufa, Mineralnye Vody, Perm, Irkutsk, Krasnoyarsk and Vladivostok airports
East Line Group
Domodedovo
33.04
Vnukovo-invest
Vnukovo
12.73
Pulkovo (St Petersburg)
14.30
Tolmachevo (Novosibirsk)
3.96
Chelyabinsk
1.40
Volgograd
0.70
Astrakhan
0.40
Tomsk
0.54
Barnaul
0.39
Chita
0.33
Perm
1.32
Basel-Aero (50%)
Sochi
3.10
Changi (30%)
Pashkovsky (Krasnodar)
3.40
Sberbank (20%)
Gelendzhik
0.24
Anapa
1.00
Koltsovo (Yekaterinburg)
4.53
Kurumoch (Samara)
2.38
Rostov-on-Don
2.34
Strigino (Nizhny Novgorod)
1.13
Saratov Airport
0.41
Mineralnye Vody
1.92
Khrabrovo (Kaliningrad)
1.20
Northern Capital Gateways
Novaport
VTB Capital, Fraport
Roman Trotsenko (50%), Meridian Capital (50%)
Airports of South
Airports of Regions
Renova (100%)
Aeroinvest
Ramenskoye Airport (under reconstruction) Rostec Irkutsk Airport (possible in the longer term) Source: company data
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Largest projects to construct airports State authorities
Airports of South Holding
East Line Group
Airports of Regions Holding
Vnukovo-Invest
Aeroinvest
Northern Capital Gateway
Rostec
Novaport
Kaliningrad (Khrabrovo) Saint Petersburg (Pulkovo) SHEREMETYEVO DOMODEDOVO
Moscow
VNUKOVO
Nizhny Novgorod (Strigino)
RAMENSKOYE*
Kazan
Perm
Rostov-on-Don Saratov Anapa (Vytyazevo) Gelendzhik
Krasnodar (Pashkovsky) Sochi (Adler)
Volgograd
Samara Ufa (Kurumoch)
Astrakhan Mineralnye Vody
Yekaterinburg (Koltsovo) Chelyabinsk (Balandino)
Tomsk (Bogashevo) Krasnoyarsk (Yemelyanovo)
Novosibirsk (Tolmachevo) Barnaul
Chita (Kadala) Irkutsk
*under renovation
Vladivostok (Knevichi)
Source: Gazprombank estimates
Asian investors in airport infrastructure Strategic investors from Asia have expressed interest in Russian airports. For example, Changi Airports International, which manages Singapore airport, has become a partner of Basel-Aero (part of Basic Element owned by Oleg Deripaska). Changi controls 20% of Airports of South Holding. Another example is South Korea’s Incheon (the manager of its namesake airport in Seoul), which owns a minority stake in Khabarovsk airport. Moreover, the company may also participate in the management of Irkutsk airport. In China, most large airports are state-owned and their management companies do not yet invest in foreign assets. On the contrary, construction and concession companies as well as investment houses have expressed interest in foreign airports. For example, in 2014, Beijing Urban Construction Group signed a $1 bln contract with the Kyrgyz government to reconstruct Manas airport. The peculiarity of the deal is that another candidate was Rosneft, but it later pulled out of negotiations. Another Chinese company, China Machinery Engineering Corporation, has invested $300 mln in Kyrgyzstan’s second-largest airport in the city of Osh. Other examples include China Investment Corporation (CIC), which controls a 10% stake in London’s Heathrow airport; Beijing Construction Engineering Group, which has allocated GBP 800 mln for the construction of a new terminal at Manchester airport; and Chandgoung Hi-Speed Group, which is investing funds in Toulouse Blagnac Airport (France).
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SOURCES OF FINANCING: DECREASE, NO WAY TO INCREASE The main sources of financing for Russian infrastructure are as follows:
the federal budget;
the National Wealth Fund (NWF);
regional budgets;
own and borrowed funds from natural monopolies (Russian Railways) and state corporations (VEB, GK Avtodor);
private pension savings that are invested through investment funds;
loans raised from commercial banks;
private investors, including foreign investors;
cash flows from infrastructure projects.
Over the next few years, the proportion of state spending in infrastructure will decrease due to a decline in revenues. However, this decline will be offset by higher investment from the NWF and pension funds.
Over the next few years, the proportion of state spending in infrastructure will decrease due to a decline in revenues. However, this decline will be offset by higher investments from the NWF and pension funds that regain access to private pension savings.
State budget: difficult choice between higher social spending and spending on economic development Federal and regional budgets account for over half of all investments in transport infrastructure. Federal budget spending goes toward the construction and maintenance of federal roads, subsidies to state corporation Avtodor and the regions, construction and renovation of airport and port infrastructure facilities (take-off and landing strips, mooring berths and to conduct dredging operations, i.e. areas where private investments are not yet permitted). Regional budgets spend funds on construction and reconstruction of regional and municipal roads as well as the expansion of public transport and subways. In 2015, federal budget revenues are expected to fall by 13.5% YoY to RUB 12.5 trln due to the decline in oil prices and decrease in GDP (-1.9% YoY in 1Q15). However, spending will increase by 2.5% YoY to RUB 15.2 trln (compared to the initial target, expenditures were expected to decrease by 2%). The budget deficit will amount to RUB 3.1 trln (3.7% of GDP) and will be financed using the Reserve Fund and loans. When forecasting the budget, the Finance Ministry assumes an average oil price of $50/bbl and an average RUB/USD exchange rate of 61.5, figures that we currently regard as quite conservative.
In 2015, federal budget revenues will fall by 13.5%. However, spending will increase by 2.5%. Federal and regional budgets account for more than half of all investment in transport infrastructure.
The Russian government is currently discussing the draft budget for 2016-17. One option under consideration is to reduce spending across the board by 5% in real terms. Such a radical decision would lead to a 15-20% annual decrease in infrastructure spending. An alternative would be to limit growth in social spending (mainly by indexing pensions in line with the inflation rate) in an effort to maintain spending that stimulates economic growth, including transport infrastructure construction.
Increase in social spending in 2016-17 will lead to a cut in spending throughout the economy, including on infrastructure.
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RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Federal budget revenues and expenditures, RUB bln
Federal budget revenues
2011
2012
2013
2014
2015
2016*
2016**
2017*
2017**
11,366
12,854
13,020
14,497
12,736
13,854
16,272
15,006
17,089
13.1%
1.3%
11.3%
-12.1%
8.8%
27.8%
8.3%
5.0%
CAGR, % % of GDP
20.3%
20.6%
19.7%
18.6%
17.4%
16.8%
Federal budget expenditures
10,935
12,891
13,343
14,831
15,215
15,466
16,272
15,648
17,089
17.9%
3.5%
11.1%
2.6%
1.7%
6.9%
1.2%
5.0%
CAGR, %
16.5%
incl. transport spending
291
340
258
301
378
n/a
n/a
n/a
n/a
incl. federal road funds
349
442
505
527
626
n/a
619
n/a
702
431
-37
-323
-334
-2,479
-1,612
-642
Reserve Fund
2,877
1,100
242
YE Reserve Fund amount
1,920
1,018
749
Shortage/surplus
GDP Expenditures, % of GDP
56,078
62,273
66,054
78,056
73,149
82,706
83,019
90,976
89,940
20%
21%
20%
19%
21%
19%
20%
17%
19%
* new version of budget blueprint (5% spending cut in real terms) ** previous forecast Source: Finance Ministry, Gazprombank estimates
Breakdown of federal budget spending, 2015 14.3%
42.6%
4.7%
NATIONAL SECURITY SOCIAL WELFARE NATIONAL ECONOMY
8.5%
NATIONAL SECURITY AND LAW ENFORCEMENT
9.1%
INTERBUDGETARY TRANSFERS OTHER SPENDING
20.8% Source: Finance Ministry
Breakdown of consolidated budget (including regions) spending, 2015 14.3%
42.6%
4.7%
NATIONAL SECURITY SOCIAL WELFARE NATIONAL ECONOMY
8.5%
NATIONAL SECURITY AND LAW ENFORCEMENT
9.1%
INTERBUDGETARY TRANSFERS OTHER SPENDING
20.8% Source: Finance Ministry
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NWF should partially offset the decrease in budget spending The NWF has risen by 26% to RUB 4 trln this year (as of May 1, 2015), mainly due to ruble devaluation. Earlier, the government approved the upper limit for NWF spending on infrastructure projects at 60% of the fund’s assets as of January 1, 2014 (RUB 2.9 trln), implying total investment of RUB 1.7 trln. According to management rules, all projects in which the fund invests should be self-financing.
Around 42% of NWF funds (RUB 1.7 trln) will be spent on infrastructure. A total of 11 infrastructure projects have been approved thus far: they will tap NWF funds equal to RUB 800 bln.
In 2014, the government approved 11 infrastructure projects that will tap NWF funds equal to RUB 800 bln, of which RUB 200 bln has already been allocated. The largest amount was earmarked for Russian Railways projects – RUB 250 bln, while another RUB 300 bln will be invested in construction of the Central Ring Road and Yamal-LNG (RUB 150 bln each). Another RUB 900 bln remains unallocated and the proportion of these funds to be invested in pure infrastructure projects remains unclear. The government is currently reviewing new projects from Rosneft, Russian Railways, VEB and other contenders. We think that NWF resources will be tapped in later years to build the Kerch Strait Bridge and the Moscow-Kazan HSR. Nor should it be ruled out that the government may raise the spending cap due to an increase in the size of the fund itself, thus releasing an additional RUB 600 bln. Infrastructure projects financed from NWF, RUB bln* 150.0
CENTRAL RING ROAD TSKAD (AVTODOR) BAM AND TRANS-SIBERIAN RAILWAY MODERNIZATION (RUSSIAN RAILWAYS) HANHIKIVI-1 NUCLEAR POWER PLANT IN FINNLAND (ATOMENERGOPROM) ELEGEST - KYZYL - KURAGINO RAILROAD (TUVA ENERGY INDUSTRIAL CORP)
100.0
75.1 30.2
TRACTION ROLLING STOCK ACQUISITION (RUSSIAN RAILWAYS) DIGITAL DIVIDE ELIMINATION (II-4)
74.9
30.0
23.0 4.1 22.0
APPROACHES TO AZOV - BLACK SEA BASIN PORTS (RUSSIAN RAILWAYS)
10.3
EASTERN SECTION OF BAM (RUSSIAN RAILROADS)
7.5
SMART GRID (II-3)
0.0 1.1 0.0
UNDRAWN FINANCING FACILITY, RUB BLN
57.5
86.9
GAS PRODUCTION UNIT (YAMAL LNG)
APPROACHES TO NW PORTS (RUSSIAN RAILWAYS)
50.0
92.5
50.0
100.0
150.0
200.0
FUNDED FROM NWF, RUB BLN Source: GK Avtodor * as of April 1, 2015
Pension savings — a major investment resource is again at play The Russian government has definitively adopted a key economic decision — to maintain the savings part of the pension system to which workers born after 1967 will continue to have 6% of their salaries deducted. At a time when funding from foreign markets is limited, the government is focusing on a domestic source of long money that totals more than RUB 300 bln per year. Indeed, pension savings are most suited for long-term capital-intensive infrastructure projects with a lengthy payback period. In addition, pension savings contribute to the expansion and raise the stability of the country’s financial system, in particular, the equity market. As of end 2014, the total value of assets invested in pension savings exceeded RUB 3 trln (4% of GDP). Of this amount, 62% (RUB 1.9 trln) of the assets were managed by a state management company on behalf of VEB, while 38% came from private pension funds and asset management companies.
31
As of end 2014, the total value of assets invested in pension accruals totaled more than RUB 3 trln (4% of GDP). To compare, the share of pension savings in Brazil equals 15% of GDP, in Chile 60%, and in the US, Canada and the UK 70-100%.
JULY 3, 2015
Pension savings growth dynamic, RUB bln
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Pension savings management, 2014, $ bln and %
5,000 4,500 4,000
1,130, 37%
3,500 3,000 2,500 2,000 1,500
1,900, 62%
1,000 500
38.2, 1%
0
VEB PRIVATE AM NON-STATE PENSION FUNDS
2007 2008 2009 2010 2011 2012 2013 2014 2015E2016E2017E VEB
PRIVATE AM
NON-STATE PENSION FUNDS
Source: Finance Ministry, CBR, Gazprombank estimates
Source: Finance Ministry, CBR, Gazprombank estimates
Dynamic of VEB’s investment portfolio structure, 2005–13 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2005
2006
2007
2008
2009
2010
2011
RUSSIAN GOVERNMENT SECURITIES
RUSSIAN BONDS
CASH
BANK DEPOSITS
MORTGAGE-SECURED BONDS
OTHER
2012
2013
Source: Finance Ministry
Dynamic of structure of private pension fund portfolios, 2005-14 100% 80% 60% 40% 20% 0% 2005
2006
2007
2008
2009
2010
2011
2012
2013
EQUITIES
RUSSIAN GOVERNMENT SECURITIES
GOVERNMENT SECURITIES OF RUSSIAN REGIONS
RUSSIAN BONDS
CASH
BANK DEPOSITS
MORTGAGE-SECURED BONDS
OTHER
2014
Source: Finance Ministry
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JULY 3, 2015
Average breakdown of private pension fund investments via pension savings, 2010–14
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Average breakdown of VEB State Trust Management Company’s investment via pension savings, 2010–14 CASH
CASH
7%
3%
9%
4% DEPOSITS
29%
MUNICIPAL BONDS
2%
52%
61%
КОРПОРАТИВНЫЕ ОБЛИГАЦИИ
6%
18% 1%
CORPORATE BONDS
4%
DEPOSITS
4%
SOVEREIGN BONDS
42%
11%
SOVEREIGN BONDS (EXCL. GOVERNMENT SAVING BONDS) GOVERNMENT SAVING BONDS MUNICIPAL BONDS
82%
CORPORATE BONDS OTHER
OTHER
Source: CBR, Gazprombank estimates
Source: CBR, Gazprombank estimates
Will investment in infrastructure securities be attractive for pension funds? We believe they will be. The fact is that one of the main goals of pension funds is to offer yields above the inflation rate. Historically (2005-14), pension funds have yielded 1.5-2.0% less than the inflation rate. With inflation averaging about 9% over the past 10 years, the average yield on the investment portfolio of VEB and private pension funds is about 7-8% (even though some private pension funds have of course managed to achieve yields considerably higher than inflation). Infrastructure bonds offer yields based on the principle of inflation +X%, where X% is the risk premium of an issuer or a project. State-owned Russian Railways and GK Avtodor place bonds with coupon set at an inflation rate +1%. Furthermore, pension funds have the ability to invest in the equity capital of infrastructure projects where yields are higher compared to bonds. For instance, one of Russia’s largest pension funds, Blagosostoyanie, recently gained control over the construction company Mostotrest, which has number of equity holdings, including those in several build-operate-transfer (BOT) projects. The Economy Ministry forecasts that the average yield of pension accruals will be 7.03% with an average annual inflation rate of 5.18%. Average annual yield of pension savings 50% 40% 30% 20% 10% 0% -10% -20% 2007
2008
2009
2010
2011
2012
2013
2014
VEB (EXTENDED INVESTMENT PORTFOLIO)
PRIVATE MANAGEMENT COMPANIES
INFLATION
PRIVATE PENSION FUNDS Source: Finance Ministry
33
One of the main tasks of pension funds is to offer yields higher than the inflation rate. That said, historically (2005-14), pension funds have yielded 1.5-2% less than inflation.
JULY 3, 2015
Earlier, pension savings also played an important role as a source of financing for investment projects. For example, VEB invested over RUB 200 bln in Russian Railways bonds, RUB 126 bln in FGC bonds, and RUB 30 bln in Gazprom bonds. In 2013-14, RUB 280 bln was invested in infrastructure bonds with a floating rate of inflation + 1%. Overall, as of end 2014, infrastructure bonds worth over RUB 380 bln were placed in investment portfolios.
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Pension savings recovery in 2015 will bring up to RUB 250 bln (private pension funds will receive a total of RUB 526 bln, including from VEB). Full re-establishment of pension savings starting in 2016 will bring to the market over RUB 300 bln per annum.
In 2015, private pension funds will receive RUB 526 bln, including RUB 327 bln from socalled passive pension contributors, i.e. those who stated their preference in 2013 to switch over from VEB to private managers, and another RUB 180 bln as contributions to private pension funds in 2H13, i.e. funds that were frozen during the time when the system of guaranteed pension savings was being formed. Thus, the recovery of pension savings will yield about RUB 200 bln of new money in 2015.
Bank loans: interest rate must be below 11% in order to finance infrastructure In Russia, the main creditors of infrastructure projects are major banks, including Gazprombank, Sberbank and VTB. Foreign banks on the Russian market essentially take no part in this process not only for political reasons, but also because of difficulties related to currency risks, an issue that is especially important when attempting to fund long-term projects. The economic crisis and hike in the CBR’s key rate have made the cost of bank loans prohibitive for the implementation of infrastructure projects. For example, when road concessions are implemented, ROI financial models for these projects call for lending costs no higher than 11%, whereas the current cost reaches 14-15%. For this reason, many investors are being forced to halt project implementation and wait for the CBR to lower its key lending rate. However, we expect lending to resume by year end as the rate is lowered. Overall, banks maintain great interest in lending for large infrastructure projects, since most of them are in high demand in the Russian economy and capable of generating steady cash flow, part of which will service loans issued earlier. In addition, substantial amendments to Russian legislation governing the securities market in 2014-15 (see below) will act as an incentive for further expansion of lending infrastructure, including ventures carried out on terms of project financing.
34
The economic crisis and hike in the CBR’s key rate have made the cost of bank loans prohibitive for the implementation of infrastructure projects. For example, when road concessions are implemented, ROI financial models for these projects call for lending costs no higher than 11%.
JULY 3, 2015
LEGISLATIVE AMENDMENTS WILL LEAD TO AN INCREASE IN INFRASTRUCTURE BOND ISSUES In 2014-15, the Russian government adopted important amendments to the Law on the Securities Market, the Law on Concessions, the Civil Code, and the Law on Joint-Stock Companies, which expand opportunities for funding infrastructure projects, incentivize the attraction of private investments, lower investor risks, and promote the development of project financing and the issuance of full-fledged infrastructure bonds.
Mortgage relations. Amendments to the Civil Code expand the definition of a mortgage, as this concept now includes property to be used in the future, as well as rights of claim which arise from existing or future obligations. Pursuant to the approved amendments, a bank account can be subject to lien. Earlier, funds held in a settlement account could not be attached by way of lien. The mortgager’s revenue derived from the use of property subject to pledge, lien or mortgage can be used to satisfy lien requirements (for example, rental payments, fee for the use of an infrastructure facility, etc).
Another newly introduced concept is that of a mortgage management agreement whereby a creditor or third party can enter into such an agreement on behalf of all creditors, while exercising all the rights and obligations of the mortgager. Accordingly, in the Law on the Securities Market, the concept of cash-securitized bonds was introduced.
Prioritized execution of bond obligations. A new clause (27.5-6) was added to the Law on Securities that introduces the concept of securitized bonds with differentiated prioritization for the execution of obligations. The issuer is entitled to set in the issue prospectus the terms of priority for execution of obligations secured by one and the same collateral, which will be applicable when the object of security is subject to enforcement, when cash is received using the available collateral, and in the case of premature repayment. This novelty makes it possible to issue subordinated paper under Russian law, specifically for Russian borrowers.
Specialized companies. The Law on Joint-Stock Companies introduces the concept of SPVs — a “specialized company” that is subdivided into a “specialized financial company” and a “specialized project financing company” (Section 3.1.2 of the Law on Joint-Stock Companies). The purpose and object of specialized financial companies are as follows: 1) to acquire monetary claims under credit agreements, loan agreements, or other obligations, including rights of claim, which arise in the future, and 2) to issue bonds collateralized by rights of claim. For specialized project financing companies the purpose and object of activity is to fund long-term (at least three years) investment projects by acquiring rights of claim that arise as a result of the implementation thereof, and to issue bonds collateralized by rights of claim. SPVs are an instrument required for the securitization of assets (which in special cases may involve project bonds), and an off-balance sheet entity that acquires rights of claim related to the proceeds from bond placements. In addition, a term in a bond issue may envisage limiting creditors’ claims to the funds which SPVs may earn in case of the enforcement of security (limited recourse). This measure protects the assets of a project company or bank that arranges securitization directly against the claims of creditors. The charter of a specialized company may contain additional limitations on the object and types of activity, thus creating additional opportunities for control over the distribution of funds on the part of creditors. Notably, specialized companies are exempted from a number of requirements that apply to open joint-stock companies and limited companies (in particular, in 35
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
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relation to large deals/interested party deals, and net assets). In addition, there is a simplified bankruptcy procedure for specialized companies (no supervision, external management or financial rehabilitation are required). This should allow bondholders to honor obligations as quickly as possible through the enforcement of security.
Nominal accounts and escrow accounts. The Civl Code defines two new types of accounts. A nominal account – which the holder opens (for example, a project company) in order to perform cash transactions in cases when the relevant rights are held by another party – the beneficiary (creditors/bondholders). The account agreement may limit the range of transactions that can be performed at the owner’s instructions (the project company), thus making it possible to eliminate the risks of unauthorized use of funds and the rights of claims used to secure the bonds. Furthermore, creditors may assign the bank in which a nominal account is held to monitor spending of cash (for example, by setting debt repayment priority). An escrow account involves depositing funds in an account that is managed by an escrow agent (bank) for the purpose of assigning these funds to another party – the beneficiary when specific grounds for such action arise. An escrow account is a widespread mechanism that project companies use as additional bond security, or as backup funds to repay liabilities on securities that can be deposited by the shareholders of a project company and tapped in case of default.
Risk-taking methods for cash-securitized bonds by “initial creditors”. A separate Central Bank instruction (No. 3309-U dated July 7, 2014) establishes ways and means for risk-taking by initial creditors for liabilities, monetary claims subject to lien under SPV bonds). In Western and Russian practise (concession agreements) initial creditors are the sponsors of a project company/concessionaires, who are the company’s shareholders or major creditors. Under the terms of a bond issue of the specialized company, which is secured by monetary claims, the initial creditors can assume part of the risks by providing a securityship, a special-purpose loan to repay liabilities to bondholders, redeem a junior tranche under a bond placement, etc.
The Law on Concessions guarantees the concessionaire a revision of the terms of the concession agreement in case legislative amendments result in deterioration of the standing of the concessionaire, as a result of which the latter is deprived to a significant extent of what the concessionaire was entitled to receive when entering into a concession agreement. The legislative amendments establish two grounds for the application of this provision: a change in the concessionaire’s total tax burden and deterioration of the standing of the concessionaire, as a result of which the latter is deprived to a significant extent of what the concessionaire was entitled to receive when entering into a concession agreement, including cases when the concessionaire is subject to a system of prohibitions and limitations that worsen the latter’s standing compared to the system that was previously in effect.
The above-mentioned innovations lay the framework for launching infrastructure bonds with a “complex” structure and considerably expand leeway for the securitization of assets by Russian banks. Earlier, securitization under Russian law was limited to mortgage-backed bonds. They were used to securitize other classes of assets under deals executed by companies incorporated abroad (for example, to issue bonds of HC Finance-1 that were securitized using a pool of consumer loans). The legislative amendments should make it possible to securitize transactions executed in Russian jurisdiction.
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RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
CHINESE INVESTMENT IN FOREIGN ASSETS: LEVERAGING DOMESTIC GROWTH In order to better assess the scale of interests and the ability of China to invest in Russian assets, we have analyzed the dynamics and structure of investments by Chinese companies worldwide over the past 10 years. In our analysis, we used the database of the US analytical center Heritage Foundation, which contains information on deals executed by Chinese companies in foreign assets, data from the Chinese Statistics Committee, Bloomberg, and a number of media outlets. Slowdown in growth prompts search for new development models Thirty-six years after the beginning of economic reforms, China in 2014 became the world’s biggest economy in terms of purchasing power parity, overtaking the US, which had held leadership for the past 100 years. During the reform period, per capita GDP climbed 30-fold, reaching the level of such countries as Peru, South Africa and Bulgaria. China’s international currency reserves stand at $3.8 trln (Japan ranks second, with reserves three times lower at $1.3 trln). Over the past 15 years, excellent transport infrastructure has been established in China: the world’s longest system of high-speed railroads and highways, including the creation of state-of-the-art airports and ports. These factors, among others, have provided the country with an average annual pace of industrial production in excess of 10% compared with the 3-4% global average. China’s industrial production index
Thirty-six years after the beginning of economic reforms, China in 2014 became the world’s biggest economy in terms of purchasing power parity, overtaking the US, which had held leadership for the past 100 years.
China’s gold and FX reserves, $ bln
16%
4,500
90%
14%
4,000
80%
3,500
70%
12%
3,000
60%
10%
2,500
50%
8%
2,000
40%
6%
1,500
30%
1,000
20%
500
10%
4% 2%
FX RESERVES
Source: National Bureau of Statistics of China
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2005 2006 2007 2008 2009 2010 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15
2001
0% 2000
0
0%
RELATIVE TO GDP Source: IMF
However, growth has slowed down recently, raising discussion of whether China will be capable of maintaining growth of at least 6-7% over the following decade. Given that the country possesses enormous human resources and technological capabilities, it will be necessary for China to continuously secure a high utilization rate of these resources. This is especially the case in the construction industry, where there have recently been signs of an increasingly large-scale crisis. Despite the fact that China is still carrying out dozens of major infrastructure projects, the scope of construction work is in decline compared to volumes over the past decade. For this reason, the Chinese authorities are searching for new ways and means to achieve long-term growth, which can be summarized as follows:
More active economic assistance to neighboring states using the financial resources of China to leverage its own exports and overall growth (the Silk Road Economic Belt project).
Export of capital. Large-scale increase of investment in the assets of other countries. In particular, this includes resources used to reduce its reliance on
37
The Chinese economy is slowing. Given that the country possesses enormous human resources and technological capabilities, it will be necessary for China to continuously secure a high utilization rate of these resources. The Chinese authorities are searching for new ways and means to achieve long-term growth.
JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
commodity imports and in transport infrastructure to facilitate access to these resources.
Export of technology, especially in the area of transport construction. Specifically, China is attempting to secure global leadership in the construction of high-speed railways.
China’s foreign investment exceeds $1 trln Over the past 10 years, China’s investment in foreign assets rose from $19 bln to $150170 bln per year, exceeding $1 trln in total. By comparison, the US, which remains the world’s largest investor in the assets of other countries, invests about $300 bln per year, with cumulative foreign direct investment exceeding $5 trln.
Over the last 10 years, China’s investments in foreign assets rose from $19 bln to $150170 bln per year, exceeding $1 trln in total.
Nearly half of China’s investment structure is related to the energy industry, including the purchase of stakes in oil and gas and utilities companies as well as the development of mineral deposits. According to Heritage Foundation data, the largest recipients of investment are the US and Australia, in which Chinese companies have invested $72 bln and $61 bln, respectively, over the past 10 years. However, the largest region in terms of investment received from China is Africa, in which $150 bln has been invested over the past 10 years, with the largest single recipients being Algeria ($21 bln) and Nigeria ($15 bln). In exchange for access to Africa’s natural resources, Chinese companies are actively investing in that continent’s transport infrastructure. Chinese companies are building railways in a number of African countries. For example, one of the biggest projects is being carried out by China Civil Engineering Construction Corp. in a venture that involves building a 1,300 km railway at a cost of more than $7 bln in the Republic of Chad with financial support from Export-Import Bank of China.
The largest region in terms of Chinese investment is Africa, in which $150 bln has been invested over the past 10 years.
China’s investment in foreign assets, $ bln
Structure of China’s investment, 2005–2014, $ bln and %
180
250
160
135, 16%
200
140
20, 2% 32, 4% 10, 1%
AGRICULTURE SECTOR CHEMICAL INDUSTRY ENERGY SECTOR
120 100 80 60
150
27, 3%
100
86, 10%
FINANCE SECTOR METALS REAL ESTATE
40
50
20 0
124, 14%
0 2005 2006 2007 2008 2009 2010 2011 2012 2013 INVESTMENTS, $ BLN
41, 5%
NUMBER OF DEALS Source: Heritage Foundation
396, 45%
TECHNOLOGIES AND COMMUNICATIONS TRANSPORTATION OTHER Source: Heritage Foundation
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Structure of China’s investment by region, 2005–14, $ mln and %
NORTH AMERICA US
50
SOUTH AMERICA
40
SOUTH-EAST ASIA
10
Source: Heritage Foundation
ARGENTINA
ALGERIA
IRAN
PERU
VENEZUELA
NIGERIA
SAUDI ARABIA
AFRICA
RUSSIA
EUROPE
UK
US
0 KAZAKHSTAN
127, 15%
24 24 21 21 20 18 17 17 15 15
20
AUSTRALIA
119, 14%
31 31
BRAZIL
97, 11%
39
30
WESTERN ASIA
61, 7%
61
60
CANADA
72, 8%
72
70
INDONESIA
52, 6% 104, 12%
80
AUSTRALIA
150, 17%
Top 15 countries in which China makes direct investment, 2005-14, $ bln
MIDDLE EAST
87, 10%
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Source: Heritage Foundation
Largest deals concluded by Chinese companies over 2005–1H14 FOREIGN PARTNER /OBJECT OF INVESTMENT
SECTOR
COUNTRY
Nexen
Electricity
Canada
Rio Tinto
Aluminum
Australia
Railways
Venezuela
Addax Petroleum
Electricity
Switzerland
40%
Repsol
Oil and gas
Brazil
100%
Smithfield Foods
Agriculture
US
$6,500
Electricity
Pakistan
CITIC and China Railway Construction
$6,200
Car manufacturing
Algeria
2013
China Power Investment
$5,950
Aluminum
Guinea
2014
Minmetals
$5,850
Copper
Peru
2011
China Railway Construction
$5,630
Railways
Chad
2007
ICBC
$5,600
20%
Standard Bank
Banking
South Africa
2009
CNPC
$5,590
37%
BP and Iraq South Oil
Oil and gas
Iraq
2013
CNPC
$5,300
8%
KazMunaiGas National
Oil and gas
Kazakhstan
2007
CIC
$5,000
10%
Morgan Stanley
Banking
US
2008
CNPC
$4,990
Oil and gas
Nigeria
2010
China Railway Engineering
$4,800
Bhakta Hill Pan Pacific Railway
Railways
Indonesia
2011
Sinopec
$4,800
30%
Galp Energia
Electricity
Brazil
2010
Sinopec
$4,650
9%
ConocoPhillips
Oil and gas
Canada
2008
China Ocean Shipping
$4,560
Maritime transport
Greece
VALUE OF DEAL, $ MLN
INTEREST IN PROJECT
YEAR
INVESTOR
2012
CNOOC
$15,100
2008
Chinalco
$12,800
2009
China Railway Engineering
$7,500
2009
Sinopec
$7,200
100%
2010
Sinopec
$7,100
2013
Shuanghui
$7,100
2013
China National Nuclear
2006
11%
Glencore
Source: Heritage Foundation
Incidentally, not all companies greet China with open arms. According to Heritage Foundation data, Chinese companies have “disrupted” 130 major deals worth $470 bln for various reasons over the past 10 years (2005-14). The largest of these included: Rio Tinto’s refusal to sell a stake to Chinalco for $19.5 bln and the prohibition by US authorities to allow CNOOC to purchase US oil company Unocal for $18 bln, while
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RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
China Development Bank failed in 2008 to take over Germany’s Dresdner Bank for $13.9 bln, which went to Commerzbank. China’s focus shifts from Africa to Latin America China has officially announced plans to invest $500 bln until 2020 in the economies of other countries, of which one half is to be channeled into Latin America (Brazil, Peru, Colombia, Chile and Venezuela). Thus, at issue is an amount larger than investments in Africa. In Brazil alone, China is ready to invest $50 bln. One of the main projects should be the construction of a railway between the Atlantic coast of Brazil and the Pacific coast of Peru, thus making it possible to lower the cost of exporting goods from these countries to China. Needless to say, the infrastructure itself will be built by Chinese companies.
China has officially announced plans to invest $500 bln until 2020 in the economies of other countries, of which one half is to be channeled into Latin America.
The following example should suffice to compare the scale of China’s interests in various countries: China is prepared to invest just $20 bln in India’s economy over the next five years, most of which will go toward upgrading the country’s railroad system, including the construction of an HSR line. By contrast, in neighboring Pakistan, China is discussing a project involving an economic channel worth $46 bln. These funds will be invested in a network of highways, trunk railways and pipelines, which will connect the two countries. This project is to be carried out under the Silk Road Economic Belt, which China recently unveiled to the global community (see below).
China’s investment in Russia: up 70% in 2014, but will it continue? Over the past 10 years, the scope of China’s investment in the Russian economy has been quite modest. According to data from Heritage Foundation, investments over the past decade totaled about $21 bln (ranking eighth among the list of countries). However, according to our estimates, many of the reported Russian-Chinese deals were never implemented, so the actual amount of investment in Russian assets is lower. Specifically, CBR data show that direct investment from China in Russia totaled about $15 bln over the past 10 years.
CBR data show that direct investments from China in Russia totaled about $15 bln over the past 10 years.
In 2014, according to the CBR, the total volume of FDI in Russia fell 70% to $21 bln. Such a sharp drop was due not only to the conflict in Ukraine, the fall in oil prices and ruble devaluation, but also the high-base effect of 2013, when the volume of FDI totaled $69 bln as a result of the Rosneft-BP deal.
Russian and Chinese leaders have set a goal of increasing the volume of direct investment from China at up to $20 bln per annum, placing Russia among the top five countries in terms of Chinese foreign investment.
Furthermore, the volume of China’s foreign direct investments in Russia is rapidly on the rise. According to data from the Chinese Trade Ministry, this figure was over five-fold higher in 2013 vs. 2012 at $4 bln, and up another 73% in the first eight months of 2014. Thus, China’s overall direct investments in 2014 stood at about $7 bln. Notably, a large part of these investments were loans made to Russian energy companies (Rosneft and Transneft). Given such impressive growth, Russian and Chinese leaders have set a goal of increasing the volume of direct investment from China at up to $20 bln per annum, placing Russia among the top five countries in terms of Chinese foreign investment.
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Foreign direct investment in Russia, $ bln
Foreign direct investment in Russia, $ bln
80
69
8
30
0
37
2
50 30
13
13 23
27
14
51
43
38
40
37
30 29
33
24
32
20
24
10 -3
-10
21
16 0.5
0.4
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 EQUITY
55
50
22
40
56
60
6
50
69
70
60
10
75
80 6
70
20
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
0.2
0.4
0.6
0.3
0.7
4.1
7.1
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
IN DEBT INSTRUMENTS
TOTAL Source: CBR
INCL. FROM CHINA Source: CBR, Chinese Ministry of Commerce
Russian-Chinese investment fund At the end of 2011, the Russian-Chinese Investment Fund was created. Its charter members were the Russian Direct Investments Fund (RDIF) and China Investment Corporation (CIC), each of which was required to invest a total of $2 bln. Since then, the Fund has invested in shares of the Magnit retail chain and acquired a 42% equity stake in Russian Forest Products Group located in the Far East. The volume of investment was not disclosed, but it is believed that the funds will be directed to construction of the Center for Deep Processing of Wood — the largest such facility in the region. Moreover, Russia-China Investment Fund (RCIF) together with the government of Heilongjiang Province plan to establish a specialized investment fund to invest in agricultural projects in Russia and China. In May, RCIF, Sukhoi Aviation Holding Company, Xixian New Area Management Committee (China), and New Century International Leasing signed an agreement to establish a leasing company, which over a three-year period will purchase up to 100 SSJ-100 aircraft from Sukhoi Aviation Holding Company for a total of about $3 bln.
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NEW “SILK ROAD”: DEEP INTEGRATION WITH COUNTRIES OF CENTRAL ASIA One of the key elements of China’s new economic policy will be active cooperation in economic growth and the integration of neighboring countries through China’s financial resources, which will support its exports and own growth. During his visit to Kazakhstan in September 2013, Chinese President Xi Jinping for the first time mentioned the need for closer cooperation between China and countries of Central Asia, which he invited to participate in the creation of an economic zone entitled the Silk Road Economic Belt. This large-scale project spans the three continents of Asia, Africa and Europe. He associated this project with the Great Silk Road — the main trading route between Asia and Europe that existed during the reign of the Han dynasty between 200 BC and 200 AD. Its main goal is deeper economic integration between countries of the region, an increase in volumes of investment, radical improvement in quality of transportation infrastructure, and a reduction of trade barriers. The zone of interests of the economic belt encompasses countries with a total population of around 3 bln. The economies of most of these countries are significantly weaker compared to that of China, while having lower living standards. Thus, more active financial and economic help on the part of China will support growth in their domestic economies.
The Silk Road Economic Belt envisions deep economic integration between Asia and Europe, an increase in volumes of investment, radical improvement in quality of transportation infrastructure, and a reduction of trade barriers. The zone of interests of the economic belt encompasses countries with a total population of around 3 bln.
Silk Road Economic Belt: project details At end March, the National Development and Reform Commission published the general parameters of the new Silk Road. Aside from its land-based economic belt, China proposed to establish a maritime route (Maritime Economic Belt). The land-based route begins in the central part of China in the city of Han and proceeds through Kazakhstan, Kyrgyzstan, Turkmenistan, Iran, Turkey, Russia and further to European ports. The sea route stretches through the Sea of China to the Indian Ocean passing Indonesia and Malaysia. The route then passes India and Kenya moving though the Suez Canal to Greek and Italian ports in the Mediterranean Sea. The Overland route is based on three transportation corridors:
Upper: China – Mongolia – Russia – North Europe;
Central: China – Central Asia – Western Asia (Turkey) – Europe;
Lower: China – Southeast Asia – Indian Ocean.
New Overland and Maritime Silk Road
Development of existing corridors Helsinki
Moscow
Saint-Petersburg
Rotterdam
Rotterdam Calais Paris
Duisburg Venice Istanbul Athens
Almaty Khorgos Urumqi Bishkek Samarkand Tehran
Berlin
Moscow
Lanzhou Xi’an
Dushanbe
Tashkent Tedzhen
Shanghai Kolkata
Colombo
Chelyabinsk
Fuzhou Zhanjiang Quangzhou Beihai Guangzhou Hanoi Haikou
Teheran Khomeini Port Gwadar Port
Kuala Lumpur
Mashhad Islamabad
Kashgar
Hotan
Karachi
Urumqi
Golmud
Beijing Hohhot Lanzhou Tianjin Lianyungang Xi’an Xuzhou
Chengdu Chongqing Guiyang
Nairobi Fangcheng
Jakarta
Maritime Silk Road
Northern Corridor
Overland Silk Road Source: Xinhua News Agency
Central Corridor
Shanghai Changsha Guangzhou
Southern Corridor Source: China Daily
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Transportation corridors from Western China to Europe There are currently three overland transportation corridors linking Western China with Europe. 1) A railway route that stretches across Russia (a cross-border point is located in the town of Zabaikalsk in Russia’s Far East) to seaports on the Baltic Sea. Container trains pass this 12,800 km route over a period of 32 days. 2) A railway route across Kazakhstan (a cross-border point is located in the town of Dostyk) and Russia to Baltic and European sea ports. It takes from 16 to 21 days to cover this 10,700 km distance. 3) An alternative automobile route via Kazakhstan and Russia that takes 8-10 days to cover and is 2,000 km shorter than the previous route. However, this road does not facilitate large cargo flows. The sea route is the main trade channel linking China with Europe. This route requires far lower costs than overland channels, but takes 45-60 days to transport container cargoes. Transportation of cargoes by sea could require just half of the costs needed for transportation via the overland routes. However, overland routes (which take less time) could be more attractive for those companies located in Western China; those that are interested in minimizing their working capital; and those with a low share of transportation costs. The overland trade volume between China and Europe is still marginal — only around 200-300 thousand containers per year. By comparison, the cargo turnover between China and Europe accounts for 6 mln containers.
Key transportation routes between China and Europe
RUSSIA St. Petersburg
Moscow
Astana
KAZAKHSTAN Beijing
Traditional China-Europe sea route
CHINA
China-KazakhstanRussia-Europe railway
Trans-Siberian Railway Northern Sea Route Source: GK Avtodor
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RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Container cargo turnover, TEU mln 180 160
160
140 120 100 80 60 40 20
6
0
0.2
2005 CHINESE PORTS' CONTAINER CARGO TURNOVER CARGO TURNOVER BETWEEN EUROPE AND CHINA CONTAINER TRANSIT THROUGH RUSSIA Source: World Bank, TransContainer
The concept of the Silk Road Economic Belt envisages the construction and modernization of transportation infrastructure of member states, including automobile and railway roads, ports, border-crossing routes, airports, telecommunications and electricity facilities, and pipeline transport. In addition, the project calls for the standardization of infrastructure, customs procedures, and information systems to achieve the utmost unification of the entire logistics chain in order to speed up and cut the costs of transfer of goods among countries in the region. The project also envisages the creation of free-trade zones, the introduction of a “single window” principle at customs offices, and the elimination of administrative barriers hampering trade. The program document on the creation of the Silk Route says that member states should cooperate in the development of coal, metals, and oil and gas fields, as well as in the search for new energy sources, and the development of IT and biotechnologies. Financial integration: China ready to provide funding The document speaks about the necessity for deeper financial integration, and proposes to boost volumes of FX swap deals and create a unified bond market in Asia. The Asian Infrastructure Investment Bank (AIIB), established by 21 countries and headed by China, should lend financial support to the Silk Road. The whole concept of creating the Silk Road indicates that the Chinese government is willing to support countries with good credit ratings and issue yuan-denominated bonds, while Chinese companies will be able to attract funds from participating countries along the route. Financing of infrastructure projects within the Silk Road will be facilitated by the Silk Road Fund, to which the Chinese government has already contributed $100 bln. The Fund is part of the AIIB. According to the project, China is prepared to act as a coordinator and initiator under the project framework. Asian Infrastructure Investment Bank (AIIB) The Asian Infrastructure Investment Bank (AIIB) — an international financial institution established at China’s initiative — will be a cornerstone source of funding for Asian infrastructure projects. The bank is currently being developed and is expected to be officially launched toward end 2015. The bank’s focus is on expansion of financial cooperation between countries within the Asia-Pacific Region, participation in financing of Asian infrastructure projects, as well as projects designed to strengthen trading and economic ties among countries within the region and globally. Essentially, the AIIB should act as an alternative for such financial institutions as the IMF, the World Bank and the Asian Development Bank, which are considered to primarily support the interests of the US, Europe and Japan. Moreover, the Chinese authorities estimate Asia’s overall need for infrastructure
44
The concept of the Silk Road Economic Belt envisages the construction and modernization of transportation infrastructure, standardization of customs procedures and information systems for utmost unification of the entire logistics chain in order to speed up and cut costs of the transfer of goods among countries in the region.
JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
investment until 2020 at around $8 trln, a sum that existing development banks simply lack. Setting up a new bank will boost competition with financial institutions within the Bretton Woods system. Only a few years have passed between the time of the idea’s conception and its implementation. The agreement to create the AIIB was signed in October 2014. The list of founding members includes China alongside 20 other Asian countries (Bangladesh, Brunei, Cambodia, India, Kazakhstan, Kuwait, Laos, Malaysia, Mongolia, Myanmar, Nepal, Oman, Pakistan, Philippines, Qatar, Singapore, Sri Lanka, Thailand, Uzbekistan and Vietnam). The bank’s charter capital will total $100 bln. In March 2015, the deadline passed for submission of applications from other states seeking to participate as founding members. A total of 47 countries submitted applications, including Russia. The applicants included not only Asian, but also European states (Germany, France, Austria, Norway and Sweden), Georgia, Turkey, Israel, Brazil and others. The US, Australia and Japan refused to participate in establishment of the AIIB. Ranking of development banks by capital 250
200
150
100
50
0
WORLD BANK
ADB
AIIB
AFDB
CHINA DEVELOPMENT BANK
NDB
BRAZILIAN DEVELOPMENT BANK
EBRD
Source: banks’ data, Gazprombank estimates
Russia’s role in Silk Road Project: some questions remain open Russia was mentioned in the Silk Road project. In particular, the project documentation mentions the need to tighten integration between China’s frontier provinces with Russia’s Far East, as well as to upgrade railroad infrastructure enabling the development of multimodal transportation. Moreover, the project implies the construction of a high-speed railroad connecting Beijing and Moscow. In particularly, China could take part in the construction of the high-speed MoscowKazan line, with the Silk Road Fund as a project investor, contributing as much as RUB 100 bln. Should the deal take place, it will become one of the first transactions for the fund, which is rather symbolic for the Sino-Russian relationship. In fact, the Silk Road Economic Belt is already functioning. At the end of 2014, the first 82-container freight train arrived to Madrid from the Chinese town of Yiwu. The entire trip from China to Europe took 21 days, which is at least twice faster than the alternative sea route. The train traveled through Zhejiang Province (East China), Xinjiang Uygur Autonomous Region (North-West China), Kazakhstan, Russia, Belarus, Poland, Germany, France and Spain. The total length of the main railway line exceeded 13,000 km. For the time being, this is the longest railway line between China and Europe and virtually repeats the outline of the Silk Road Economic Belt. In June, China launched another freight train from Harbin to Hamburg. The journey took 15 days, with the train covering 9,800 km, or 653 km per day. The train ran via Mongolia, Russia, Belarus and Poland. Now the goal is to reduce the travel time as much as possible, which requires modernization and unification of all participating countries’ infrastructure. 45
The idea does not yet involve the development of a fully functional transport corridor through the entire territory of Russia. On the contrary, a key focus will be on the central transport corridor, which will run through Central Asian countries.
JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
APPENDIX 1: RUSSIAN-CHINESE JOINT PROJECTS Main transportations routes between China and Europe YEAR
PARTNERS/INVESTORS
PROJECTS/AGREEMENTS/INVESTMENTS
OIL & GAS The partners jointly own Udmurtneft (Rosneft – 49.5%. Sinopec – 49.5%), which produces approximately 6.3 mln tpa.
2006
Rosneft/Sinopec
2009
Rosneft/Transneft/China Development Bank
2011
Rosneft/Sinopec
2013
Rosneft/CNPC
2013
Rosneft/Sinopec
The companies signed a memorandum on long-term oil supplies on a pre-payment basis, under which the Russian company is to supply up to 100 mln tonnes of oil over a 10-year period starting from 2014.
2013
NOVATEK/CNPC
CNPC bought 20% in NOVATEK’s Yamal-LNG project and signed a long-term deal to supply 3 mln tonnes of LNG per year from Yamal-LNG to China.
2014
Gazprom/CNPC
The parties signed a 30-year contract to supply 38 bcm of Russian gas per year to China via the Eastern route.
2014
SIBUR/Sinopec
The partners signed an agreement to set up a joint venture in China to produce 50 kt of nitrile butadiene rubber per year.
2015
SIBUR/RDIF
Chinese companies are taking part in financing of the East Siberia/Pacific Ocean oil pipeline (ESPO) under guarantees of oil supplies to China via the pipeline. The partners are jointly working on a geological study within the Veninsk licensed site, located on the Sakhalin shelf. The project’s goal is to increase the volume of oil supplies to China to 30 mln tpa. The timeline for supplies is 25 years.
Chinese investors together with the RDIF could enter SIBUR’s capital and finance the ZapSib-2 project.
Rosneft/Sinopec
The companies agreed to build a refinery with capacity of 16 mln tonnes in Tianjin by the end of 2019.
2010
Rosneft/Sinopec
The construction of Tianwan Nuclear Power Plant (third and fourth power units).
2010
EuroSibEnergo/China Yangtze Power
2010
Inter RAO/Shenhua
2012
Eastern Energy Company
2012
TGK-2/Huandian
2014
RusHydro/PowerChina/CTG
The parties signed agreements to jointly build electric power plants in European Russia and the country’s Far East. In 2015, they signed a deal to set up a JV to operate NizhneBureyskaya HPP.
2014
En+/China Shenhua Group
The companies signed a deal to develop the Zaluzhansk coal deposit; planned production totals 6 mln tonnes of coal per year.
2015
RAO ES of East/Dongfang Electric International Corporation
The companies plan to cooperate in implementation of joint projects in Russia’s Far East.
UTILITIES
The partners signed an agreement to set up a joint venture called YES Energo to build electricity generation capacities in Siberia. The companies signed a memorandum of understanding to build a plant for production of synthetic liquid fuels from coal. Inter RAO’s 100%-owned subsidiary that was created to export electricity to China. The construction of a 450 MW combined cycle cogeneration plant in the city of Yaroslavl with financing from ICBC.
ENGINEERING/TELECOMMUNICATIONS 2010
Tencent/Digital Sky Technology (DST)
2011
Fuyao Glass
2014
Tula Region/Great Wall Motors
2014
Lifan
Construction of a full-cycle facility in Lipetsk region is being considered with capacity for 60,000 automobiles
2014
Hawtai Motors
Construction of an automobile manufacturing plant is being considered with capacity for 100,000 cars
2014
GAC
Construction of an automobile manufacturing plant is being considered with capacity for 50,000 cars
2014
State Transport Leasing Company/ICBC
Purchase of 10% of DST shares. Construction of an automobile glass manufacturing plant in Kaluga region. Construction of an automobile manufacturing plant with annual capacity of up to 150,000 cars
Contract to lease three Boeing 777-300ER aircraft is to be transferred to Aeroflot
2014
MegaFon/Huawei
Seven-year contract with China’s Huawei for shipment and maintenance of communications equipment
2014
Rostec/Sinomach
Rostec agreed to create a JV with China’s Sinomach, which will invest $10 bln in utilities, transportation and infrastructure projects
46
JULY 3, 2015
YEAR
PARTNERS/INVESTORS
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
PROJECTS/AGREEMENTS/INVESTMENTS
METALS 2010
Xiyang Group
2012
China Nonferrous Metal Industry Foreign Engineering and Construction/Metals of Eastern Siberia
2012
CIC/Polyus Gold
2013
CIC/Uralkali
2014
Metalloinvest/Hopu Investments IRC
2015
Polyus Gold/China National Gold Group Corporation
The Chinese metals and mining company Xiyang Group will invest $483 mln in the first stage of development of an iron ore mine in Chita Region alongside construction of a steel-making facility adjacent to the mine. Commercial development of a multi-metal Ozyornoye field in Buryatia and construction of Ozyornoe GOK. NFC acquired a 50% stake in Ozyornoye. Acquisition of a 5% stake. Acquisition of a 12.5% stake. Strategic partnership agreement for co-development of Udokan copper field. IRC — production of iron ore and ilmenite (raw material used for titanium production) at the Sino-Russian border. 40.4% held by Petropavlovsk (Russia), 31.4% by General Nice (China), and 4.5% by Minmetals Cheerglory (China). Partnership agreement, including co-development of the Natalka field.
FINANCIAL SECTOR 2013
Moscow Exchange/CIC
2014
RDIF and Heilongjiang Province
2014
VTB/Bank of China
2014
VTB/China Exim Bank
2014
RDIF/CIC
Acquisition of a 5.6% stake. Creation of a special-purpose fund investing in Chinese and Russian agricultural projects amounting to $2 bln. VTB signed a partnership agreement with Bank of China. VTB and China Exim Bank signed an agreement to provide a credit line to the former in RMB and RUB with a sum equivalent value of $2 bln. Acquisition of a 45% stake in Russian Forest Products.
TRANSPORT AND INFRASTRUCTURE 2014
Mosinzhproekt, China International Fund and China Railway Construction Corporation
2014
GTLK/ICBC
2015
Mosinzhtrans, Nizhegorodmetroproekt and China Railway Eryuan Engeneering Group
2015
RFDI/CIC
2015
TEPK/China Civil Enginееring Construction Corporation
An agreement was signed to construct the new southwest branch of the Moscow metro. Potentially, Chinese companies may not only invest but also participate in construction of this line. Agreement on leasing of three Boing 777-3ER aircraft, which will be transferred to Aeroflot. Design work on the Moscow-Kazan HSR Construction of a bridge across the Amur river. The Russian part of the bridge will be built by the company Rubikon, the shareholders of which are subsidiaries of the Russian Direct Investment Fund (RFDI) and China Investment Corporation. According to the Chinese party’s calculations, the new bridge will shorten the delivery distance through Heilongjiang province to Khabarovsk and Moscow by 500 km, thereby reducing the delivery time by seven hours. The length of the bridge is 2.215 km, of which the Russian part will be 0.315 km. The throughput capacity will total between 5.2 mln tonnes of freight per year (first stage) and 2021 mln tonnes (second stage). Construction of the Elegest – Kyzyl – Kuragino railroad with a length of 410 km Source: GK Avtodor
47
JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
APPENDIX 2: LIST OF INFRASTRUCTURE BONDS ISSUE
RATING (S&P/M/F)
VOLUME. RUB BLN
PLACEMENT TIMELINE
OFFER
MATURITY
COUPON (CURRENT)
COUPON FORMULA*
CREDIT ENHANCEMENT
Russian Railways-32
BB+/Ba1/BBB-
10.0
July 2012
July 2022
June 2032
11.2
CPI + 210 bps
-
Russian Railways BO-09
BB+/Ba1/BBB-
25.0
June 2013
-
June 2028
10.1
CPI + 100 bps
-
Russian Railways BO-18
BB+/Ba1/BBB-
25.0
June 2013
-
April 2043
9.3
CPI + 100 bps
-
Russian Railways BO-12
BB+/Ba1/BBB-
25.0
September 2013
-
August 2033
16.0
CPI + 100 bps
-
Russian Railways BO-13
BB+/Ba1/BBB-
25.0
October 2013
-
September 2033
17.7
CPI + 100 bps
-
-
November 2038
17.9
CPI + 100 bps
-
-
November 2028
9.3
CPI + 100 bps
Russian Railways BO-15
BB+/Ba1/BBB-
25.0
November 2013
Russian RailwaysBO-10
BB+/Ba1/BBB-
25.0
December 2013
Russian Railways BO-19
BB+/Ba1/BBB-
25.0
June 2014
May 2044
10.1
CPI + 100 bps
Russian RailwaysBO-16
BB+/Ba1/BBB-
25.0
October 2014
September 2039
17.9
CPI + 100 bps
Russian Railways -33
BB+/Ba1/BBB-
15.0
March 15
February 2040
12.4
CPI + 100 bps
Russian Railways -34
BB+/Ba1/BBB-
15.0
March 15
February 2040
12.4
CPI + 100 bps
Russian Railways: total
240.0
FGC UES-22
BB+/Ba1/BBB-
10.0
August 2012
July 2022
July 2027
13.9
CPI + 250 bps
-
FGC UES-23
BB+/Ba1/BBB-
10.0
June 2013
-
April 2048
16.0
CPI + 100 bps
-
FGC UES-28
BB+/Ba1/BBB-
20.0
June 2013
April 2048
16.0
CPI + 100 bps
-
FGC UES-26
BB+/Ba1/BBB-
15.0
August 2013
June 2048
17.9
CPI + 100 bps
-
FGC UES-27
BB+/Ba1/BBB-
15.0
August 2013
July 2047
17.9
CPI + 100 bps
-
FGC UES-29
BB+/Ba1/BBB-
20.0
October 2013
July 2048
17.9
CPI + 100 bps
-
October 2048
16.0
CPI + 100 bps
FGC UES-30
BB+/Ba1/BBB-
10.0
December 2013
FGC UES-34
BB+/Ba1/BBB-
15.0
December 2013
October 2048
16.0
CPI + 100 bps
FGC UES-37
BB+/Ba1/BBB-
20.0
May 2015
March 2050
17.9
CPI + 100 bps
FGC UES-38
BB+/Ba1/BBB-
20.0
May 2015
March 2050
17.9
CPI + 100 bps
FGC UES: total
155.0
Gazprom-BO-19
BB+/Ba1/BBB-
15.0
November 2013
October 2043
n/a
CPI + 100 bps
Gazprom-BO-20
BB+/Ba1/BBB-
15.0
November 2013
October 2043
n/a
CPI + 100 bps
Gazprom: total
30.0 Face value and interest payments are guaranteed by the government if concession deal is terminated
Main Road-3
-/-/-
8.0
November 2010
-
October 2028
8.4
CPI (YoY) +0.5*GDP growth rate (YoY)
Main Road-6
-/-/-
8.2
December 2012
-
November 2028
10.0
CPI (YoY) +0.5*GDP growth rate (YoY)
Main Road-7
-/-/-
1.4
November 2012
-
October 2029
8.4
CPI (YoY) +0.5*GDP growth rate (YoY)
North-West Concession Company-3
-/-/-
5.0
October 2011
-
September 2031
12.5
CPI + 300 bps
Government guarantee for face value payment
North-West Concession Company -4
-/-/-
5.0
October 2011
-
September 2031
12.5
CPI + 300 bps
Government guarantee for face value payment
48
JULY 3, 2015
ISSUE
RATING (S&P/M/F)
VOLUME. RUB BLN
PLACEMENT TIMELINE
OFFER
MATURITY
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
COUPON (CURRENT)
COUPON FORMULA*
CREDIT ENHANCEMENT
Western High-Speed Diameter -1
-/Ba3/-
5.0
June 2011
April 2016
May 2031
8.75
Fixed before offer
Government guarantee for face value payment
Western High-Speed Diameter -2
-/Ba3/-
5.0
June 2011
April 2016
May 2031
8.75
Fixed before offer
Government guarantee for face value payment
Western High-Speed Diameter -3
-/Ba3/-
5.0
March 2012
February 2017
February 2032
9.15
Fixed before offer
Government guarantee for face value payment
Western High-Speed Diameter -4
-/Ba3/-
5.0
March 2012
February 2017
February 2032
9.15
Fixed before offer
Government guarantee for face value payment
Western High-Speed Diameter -5
-/Ba3/-
5.0
March 2012
February 2017
February 2032
9.15
Fixed before offer
Government guarantee for face value payment
Two Capitals Highway – “А1”
-/-/-
15.0
May 2015
2030
n/a
1st through 11th coupons – 13.45%; 12th through 59th coupons – CPI +3% st
Two Capitals Highway – “Б”
Concession companies: Total
-/-/-
15.0
May 2015
2030
n/a
Bonds are secured by cash claim collateral
th
1 through 11 coupons – 14.1%. 12th through 59th coupons – CPI +3%
Bonds are secured by cash claim collateral
82.6 507.6 Source: company data, Gazprombank estimates
49
JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
APPENDIX 3: RUSSIA’S LARGEST PUBLIC INFRASTRUCTURE COMPANIES COMPANY
SHAREHOLDER STRUCTURE
BONDS
DESCRIPTION
INVESTMENT APPEAL
Russian Railways is the key investor in rail infrastructure. Its annual investment budget totals RUB 400-450 bln financed via the company’s own cash flow, government contributions and bond issues, including infrastructure bonds at a rate of inflation + 1%.
100% state-owned
19 bond issues in circulation
Russian Railways, a natural monopoly managing Russia’s railroad infrastructure, is one of the world’s top three transportation companies in terms of revenues and assets. The company provides a full range of services in such areas as rail transportation, provision of locomotive haulage and railroad infrastructure assistance; repair of rolling stock; long-distance and suburban passenger transportation; container transportation, logistics and engineering services. The company’s total debt stood at RUB 843 bln as of end 2014, of which 47% was in the form of eurobonds, 20% in ruble-denominated bonds and 24% in ruble infrastructure bonds. The company’s net debt/EBITDA ratio rose from 1.79х as of end 2013 to 2.37х as of end 2014 due to revaluation of FX borrowings denominated in rubles.
Summa Group (65%), free-float (35%)
$415 mln eurobonds issued in 2018, $219 mln eurobonds issued in 2020. RUB 5 bln ruble bonds issued in 2018
FESCO Group is a transportation holding that incorporates a railroad operator, Commercial Port of Vladivostok (VMTP), as well as a proprietary fleet in the Far East, operating sea transportation between Russia and Asian countries. The economic crisis coupled with ruble devaluation pushed the company into financial hardship. The new management team has arranged debt restructuring. As of end March 2015, the company’s net debt stood at $776 mln and net debt/EBITDA at 4.3x.
The company significantly benefits from development of trading ties with China as well as expanded growth of container shipments in the region.
RUB 5 bln ruble bonds issued in 2018
Russia’s leading intermodal container shipment operator. The company owns 59% (27,000) of Russia’s total fleet of fitting platforms, operates 46% of railroad container shipments and 23% of container processing at Russia-wide railroad terminals. Operates over 60 proprietary container terminals in Russia, Kazakhstan and Slovakia.
The company significantly benefits from development of trading ties with China as well as expanded growth of container shipments in the region. TransContainer is developing container cargo shipments between Asia and Europe through Russia and Kazakhstan.
NCSP Group (NCSP RX)
Transneft (37%), Summa Group (27%), state (20%)
None
NCSP Group is Europe’s third-largest seaport operator and Russia’s No. 1 stevedoring company in terms of cargo turnover. The Group owns three ports in Russia: Novorossiysk on the Black Sea, Primorsk on the Baltic Sea and Baltiysk in Kaliningrad region. The Group’s seaports are parts of international transportation corridors linking Russia with Mediterranean, Near Eastern, North African, Southeast Asian, and North and South American countries, making it a key transit channel for Russia’s imported and exported cargoes.
The company is extending seaport capacities for container and other goods shipments and is the major trading seaport of the Northern-Southern transportation corridor.
Global Ports (GLPR LI)
APT Terminals (30.75%), N-Trans Group founders (30.75%), Polozio Ent. (9%), Ilibrinio Ent. (9%), free float (20.5%)
None
Global Ports is Russia’s top operator of container sea terminals located on the Baltic Sea and in the Far East. Terminal facilities allow it to transship over 4 mln TEU per annum.
The company benefits from increased container shipments in Russia.
None
Russia’s largest transport construction company with an order book value exceeding RUB 300 bln. Mostotrest is AK Avtodor’s top contractor. In particular, the company was contracted for most of the Moscow – St. Petersburg road. In addition to roads, Mostotrest is a large contractor for airport infrastructure construction. The company owns a 50% stake in North-Western Concession Company, a concessioner of the 15-58 km segment of the Moscow – St. Petersburg highway. In addition, Mostotrest’s portfolio includes a number of smaller-scale concession contracts that are currently under construction, but will soon become a source of the company’s cash flow.
Mostotrest is a direct beneficiary of heightened investment in transport infrastructure and development of road concessions, in which the company is already a large player.
Russian Railways (BB+/Ba1/BBB-)
FESCO (FESH RX, SD/-/B-)
TransContainer (TRCN RX, /BB+/Ba3)
Mostotrest (MSTT RX)
United Transport & Logistics Company (UTLC) (50%), FESCO (24%), EBRD (9.25%), others (16.64%)
Non-state pension fund Blagosostoyaniye (63.63%), free float (36.37%)
Source: company data, Gazprombank estimates
50
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Copyright © 2003-2015. Gazprombank (Joint Stock Company). All rights reserved This report has been prepared by the analysts of Gazprombank (Joint Stock Company) (hereinafter — Gazprombank) and is based on information obtained from public sources believed to be reliable, but is not guaranteed as necessarily being accurate. With the exception of information directly pertaining to Gazprombank, the latter shall not be liable for the accuracy or completeness of any information shown herein. All opinions and judgments herein represent solely analysts’ personal opinion regarding the events and situations described and analyzed in this report. They should not be regarded as Gazprombank’s position and are subject to change without notice, also in connection with new corporate or market events that may transpire. Gazprombank shall be under no obligation to update, amend this report or otherwise notify anyone of any such changes. The financial instruments mentioned herein may be unsuitable for certain categories of investors. This report should not be the only basis used when adopting an investment decision. Investors should make investment decisions at their own discretion, inviting independent consultants, if necessary, for their specific interests and objectives. The authors shall not be liable for any actions resulting from the use of this report. Any information contained herein or in the appendices hereto shall not to be construed as a solicitation or an offer to buy or sell any securities or advertisement, unless otherwise expressly stated herein or in the appendices hereto. Gazprombank should in no way be viewed as soliciting, facilitating, brokering or causing any persons to invest in any instrument or otherwise engage in transactions that may be prohibited to those persons under applicable laws and regulations. Investors should independently evaluate whether any investment transactions undertaken after reviewing Gazprombank research materials are permitted under any applicable economic sanctions laws and regulations or other laws applicable to their investing activities.
